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Effort: The Unrecognized Contributor to US Income Inequality

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  • J. Rodrigo Fuentes
  • Edward E. Leamer

Abstract

This paper provides theory and evidence that worker effort has played an important role in the increase in income inequality in the United States between 1980 and 2016. The theory suggests that a worker needs to exert effort enough to pay the rental value of the physical and human capital, thus high effort and high pay for jobs operating expensive capital. With that as a foundation, we use data from the ACS surveys in 1980 and 2016 to estimate Mincer equations for six different education levels that explain wage incomes as a function of weekly hours worked and other worker features. One finding is a decline in annual income for high school graduates for all hours worked per week. We argue that the sharp decline in manufacturing jobs forces down wages of those with high school degrees who have precious few high-effort opportunities outside of manufacturing. Another finding is that incomes rose only for those with advanced degrees and with weekly hours in excess of 40. We attribute this to the natural talent needed to make a computer deliver exceptional value and to the relative ease with which long hours can be chosen when working over the Internet.

Suggested Citation

  • J. Rodrigo Fuentes & Edward E. Leamer, 2019. "Effort: The Unrecognized Contributor to US Income Inequality," NBER Working Papers 26421, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26421
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    More about this item

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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