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Real Wage Inequality

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  • Enrico Moretti

    ()
    (University of California, Berkeley, USA and The Rimini Centre of Economic Analisys, Italy)

Abstract

A large literature has documented a signi cant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I de ate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I nd that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This nding does not appear to be driven by di erences in housing quality and is robust to a number of alternative speci cations. The implications of this nding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, higher cost of housing re ects consumption of desirable local amenities, and there may still be a signi cant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand of college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers' standard of living is o set by higher cost of living. The empirical evidence indicates that relative demand shifts are more important than relative supply shifts, suggesting that the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality. I thank David Card, Tom Davido , Ed Glaeser, Chang-Tai Hsieh, Pat Kline, Douglas Krupka and David Levine for insightful conversations, and seminar participants at Berkeley Economics, Berkeley Haas, Collegio Carlo Alberto in Torino, IZA, San Francisco Federal Reserve and UC Merced for many useful comments. I thank Emek Basker for generously providing the Accra data on consumption prices. Issi Romen, Mariana Carrera, Justin Gallagher, Jonas Hjort, Max Kasy and Zach Liscow provided excellent research assistance.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 34-08.

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Date of creation: Jan 2008
Date of revision: Jan 2008
Handle: RePEc:rim:rimwps:34-08

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References

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  1. Enrico Moretti, 2002. "Estimating the Social Return to Higher Education: Evidence From Longitudinal and Repeated Cross-Sectional Data," NBER Working Papers 9108, National Bureau of Economic Research, Inc.
  2. Bound, John & Holzer, Harry J, 2000. "Demand Shifts, Population Adjustments, and Labor Market Outcomes during the 1980s," Journal of Labor Economics, University of Chicago Press, vol. 18(1), pages 20-54, January.
  3. Bound, John & Johnson, George, 1992. "Changes in the Structure of Wages in the 1980's: An Evaluation of Alternative Explanations," American Economic Review, American Economic Association, vol. 82(3), pages 371-92, June.
  4. David H. Autor & Frank Levy & Richard J. Murnane, 2003. "The Skill Content Of Recent Technological Change: An Empirical Exploration," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1279-1333, November.
  5. David Card & Thomas Lemieux, 2000. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," NBER Working Papers 7655, National Bureau of Economic Research, Inc.
  6. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  7. Edward L. Glaeser & Joseph Gyourko, 2005. "Urban Decline and Durable Housing," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 345-375, April.
  8. Gordon B. Dahl, 2002. "Mobility and the Return to Education: Testing a Roy Model with Multiple Markets," RCER Working Papers 488, University of Rochester - Center for Economic Research (RCER).
  9. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-78, December.
  10. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explorations with a Dynamic General Equilibrium Model of Labor Earnings with Heterogeneous Agents," NBER Working Papers 6384, National Bureau of Economic Research, Inc.
  11. Joseph Gyourko & Christopher Mayer & Todd Sinai, 2006. "Superstar Cities," NBER Working Papers 12355, National Bureau of Economic Research, Inc.
  12. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1997. "Computing Inequality: Have Computers Changed the Labor Market?," NBER Working Papers 5956, National Bureau of Economic Research, Inc.
  13. Daniel S. Hamermesh, 1990. "A Genral Model of Dynamic Labor Demand," NBER Working Papers 3356, National Bureau of Economic Research, Inc.
  14. Douglas J. Krupka, 2009. "Location-Specific Human Capital, Location Choice And Amenity Demand," Journal of Regional Science, Wiley Blackwell, vol. 49(5), pages 833-854.
  15. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income," NBER Working Papers 11842, National Bureau of Economic Research, Inc.
  16. Thomas Lemieux, 2007. "The Changing Nature of Wage Inequality," NBER Working Papers 13523, National Bureau of Economic Research, Inc.
  17. Lawrence F. Katz & Kevin M. Murphy, 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," NBER Working Papers 3927, National Bureau of Economic Research, Inc.
  18. Michael Greenstone & Richard Hornbeck & Enrico Moretti, 2008. "Identifying Agglomeration Spillovers: Evidence from Million Dollar Plants," Working Paper Series 36-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
  19. Yuichi Kitamura & William Johnson & Derek Neal, 2000. "Evaluating a Simple Method for Estimating Black-White Gaps in Median Wages," American Economic Review, American Economic Association, vol. 90(2), pages 339-343, May.
  20. Thomas Lemieux, 2006. "Post-Secondary Education and Increasing Wage Inequality," NBER Working Papers 12077, National Bureau of Economic Research, Inc.
  21. Dew-Becker, Ian & Gordon, Robert J, 2008. "Controversies about the Rise in American Inequality: A Survey," CEPR Discussion Papers 6817, C.E.P.R. Discussion Papers.
  22. Jeff Grogger & Eric Eide, 1995. "Changes in College Skills and the Rise in the College Wage Premium," Journal of Human Resources, University of Wisconsin Press, vol. 30(2), pages 280-310.
  23. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, vol. 96(3), pages 461-498, June.
  24. Claudia Goldin & Lawrence F. Katz, 2007. "Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing," NBER Working Papers 13568, National Bureau of Economic Research, Inc.
  25. James Heckman & Lance Lockner & Christopher Taber, 1999. "Human capital formation and general equilibrium treatment effects: a study of tax and tuition policy," Fiscal Studies, Institute for Fiscal Studies, vol. 20(1), pages 25-40, March.
  26. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 67-150.
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Citations

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Cited by:
  1. Lindley, Joanne & Machin, Stephen, 2014. "Spatial changes in labour market inequality," Journal of Urban Economics, Elsevier, vol. 79(C), pages 121-138.
  2. Lindley, Joanne & Machin, Stephen, 2013. "Spatial Changes in Labour Market Inequality," IZA Discussion Papers 7600, Institute for the Study of Labor (IZA).
  3. Monaco, Kristen & Habermalz, Steffen, 2011. "Wage Inequality of U.S. Truck Drivers," IZA Discussion Papers 5444, Institute for the Study of Labor (IZA).
  4. Edward L. Glaeser & Joshua D. Gottlieb, 2009. "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 983-1028, December.
  5. Beach, Charles M., 2014. "What Has Happened to Middle-Class Earnings? Distributional Shifts in Earnings in Canada, 1970-2005," CLSSRN working papers clsrn_admin-2014-13, Vancouver School of Economics, revised 26 Mar 2014.
  6. Paul Beaudry & David A. Green & Benjamin M. Sand, 2013. "Spatial Equilibrium with Unemployment and Wage Bargaining: Theory and Estimation," NBER Working Papers 19118, National Bureau of Economic Research, Inc.
  7. Veronica Guerrieri & Daniel Hartley & Erik Hurst, 2012. "Within-City Variation in Urban Decline: The Case of Detroit," American Economic Review, American Economic Association, vol. 102(3), pages 120-26, May.
  8. Robert J. Gordon, 2009. "Misperceptions About the Magnitude and Timing of Changes in American Income Inequality," NBER Working Papers 15351, National Bureau of Economic Research, Inc.
  9. Kok, Suzanne & ter Weel, Bas, 2014. "Cities, Tasks and Skills," IZA Discussion Papers 8053, Institute for the Study of Labor (IZA).
  10. Leonardi, Marco, 2010. "The Effect of Product Demand on Inequality: Evidence from the US and the UK," IZA Discussion Papers 5011, Institute for the Study of Labor (IZA).
  11. Shihe Fu & Stephen Ross, 2010. "Wage Premia in Employment Clusters: How Important is Worker Heterogeneity?," Working Papers 2011-027, Human Capital and Economic Opportunity Working Group.
  12. Suzanne Kok & Bas ter Weel, 2014. "Cities, Tasks and Skills," CPB Discussion Paper 269, CPB Netherlands Bureau for Economic Policy Analysis.
  13. repec:wyi:journl:002155 is not listed on IDEAS
  14. Cinzia, Rienzo, 2010. "Real Wages, Wage Inequality and the Regional Cost-of-living in the UK," MPRA Paper 36390, University Library of Munich, Germany, revised Oct 2010.
  15. Thomas Kemeny, 2013. "Immigrant Diversity and Economic Development in Cities: A Critical Review," SERC Discussion Papers 0149, Spatial Economics Research Centre, LSE.
  16. Andrea Brandolini & Alfonso Rosolia & Roberto Torrini, 2011. "The distribution of employees’ labour earnings in the European Union: Data, concepts and first results," Working Papers 198, ECINEQ, Society for the Study of Economic Inequality.

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