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Explaining Rising Income and wage Inequality Among the College Educated

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  • Caroline M. Hoxby
  • Bridget Terry

Abstract

The incomes and wages of college-educated Americans have become significantly more dispersed since 1970. This paper attempts to decompose this growing dispersion into three possible sources of growth. The first source, or extensive margin,' is the increasing demographic diversity of people who attend college. The second is an increasing return to aptitude. The third, or intensive margin,' combines the increasing self-segregation (on the basis of aptitude) of students among colleges and the increasing correlation between the average aptitude of a college's student body and its expenditure on education inputs. These tendencies are the result of changes in the market structure of college education, as documented elsewhere. We find that about 70% of the growth in inequality among recipients of baccalaureate degrees can be explained with observable demographics, measures of aptitude, and college attributes. About 50% of the growth in inequality among people who have 2 years of college education can be similarly explained. Of the growth that can be explained, about 1/4th is associated with the extensive margin, 1/3rd with an increased return to measured aptitude, and 5/12ths with the intensive margin. If the intensive margin is not taken into account, the role of increasing returns to aptitude is greatly overstated.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6873.

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Date of creation: Jan 1999
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Handle: RePEc:nbr:nberwo:6873

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  1. Peter Gottschalk, 1997. "Inequality, Income Growth, and Mobility: The Basic Facts," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 21-40, Spring.
  2. Richard J. Murnane & John B. Willett & Frank Levy, 1995. "The Growing Importance of Cognitive Skills in Wage Determination," NBER Working Papers 5076, National Bureau of Economic Research, Inc.
  3. Blackburn, McKinley L & Neumark, David, 1993. "Omitted-Ability Bias and the Increase in the Return to Schooling," Journal of Labor Economics, University of Chicago Press, vol. 11(3), pages 521-44, July.
  4. Murphy, Kevin M & Welch, Finis, 1990. "Empirical Age-Earnings Profiles," Journal of Labor Economics, University of Chicago Press, vol. 8(2), pages 202-29, April.
  5. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  6. John Cawley & James Heckman & Edward Vytlacil, 1998. "Understanding the Role of Cognitive Ability in Accounting for the Recent Rise in the Economic Return to Education," NBER Working Papers 6388, National Bureau of Economic Research, Inc.
  7. Heckman, James J, 1995. "Lessons from the Bell Curve," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1091-1120, October.
  8. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-81, September.
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