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Changes in Relative Wages in the 1980s: Returns to Observed and Unobserved Skills and Black-White Wage Differentials

Author

Listed:
  • Kenneth Y. Chay

    (University of California, Berkeley)

  • David S. Lee

    (Princeton University)

Abstract

During the 1980s, did the sharp increase in the college-high school wage differential represent a rise in the college premium, or a growth in the payoff to unmeasured ability or skill? Can the slowdown in black-white wage convergence or the widening black-white gap among young workers witnessed during the 1980s be explained by a rise in the return to pre-labor market factors correlated with race? In this study, we show that it is possible to use across-group variation in within-group wage variances from multiple periods to identify the change in the return to unobservable skill, within a relatively unrestrictive error-components model of wages. The identification does not require full specification of the time-series properties or the functional form of the errors. Male earnings data from the CPS show that there is useful variation in within-group wage variances -- enough to estimate a growth in the return to unobservable skill of about 10 to 20 percent during the 1980s. In our analysis, these magnitudes imply that even alter controlling for the effects of an increase in the payoff to unobservable skill, college-educated workers still gain substantially relative to high school-educated workers, while young black men still experience a significant wage decline relative to white men during the l980s.

Suggested Citation

  • Kenneth Y. Chay & David S. Lee, 1996. "Changes in Relative Wages in the 1980s: Returns to Observed and Unobserved Skills and Black-White Wage Differentials," Working Papers 751, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:372
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    Citations

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    Cited by:

    1. Omar Arias & Walter Sosa-Escudero & Kevin F. Hallock, 2001. "Individual heterogeneity in the returns to schooling: instrumental variables quantile regression using twins data," Empirical Economics, Springer, vol. 26(1), pages 7-40.
    2. Ann P. Bartel & Nachum Sicherman, 1999. "Technological Change and Wages: An Interindustry Analysis," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 285-325, April.
    3. Kristin F. Butcher & John Dinardo, 2002. "The Immigrant and Native-Born Wage Distributions: Evidence from United States Censuses," ILR Review, Cornell University, ILR School, vol. 56(1), pages 97-121, October.

    More about this item

    Keywords

    within-group wage variances; returns to unobserved skill; classical errors-in-variables; instrumental variable estimation; omitted-variable bias;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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