US Earnings and Employment Dynamics 1961 - 2002: Facts and Interpretation

In this study we summarize the main trends in the earnings and employment distribution for the US during the last four decades using data drawn from the March CPS. Our aim is to state the facts in a simple descriptive way , which then enables the readers to formulate their own judgment on how well existing theories explain the recent trends and what other explanations might be important contenders. One of the most important changes of the past four decades has been the change in the compostion of workers by education. An equally dramatic change \96 that has received much less attention in the wage inequality literature \96 took place among women. The gap between their wages and those of men declined. Their educational attainment grew more than that of men, and their participation rate increased dramatically, which together meant that over 60% of the increase in the fraction of those with at least some college education was due to women. Despite this fact, they experienced less of an increase in inequality than men did, and in fact it was in the most educated groups that women succeeded the least in closing the gap between their wages and that of men. There are no existing theories of wage inequality that satisfacctorily address these differences among the genders. Looking at broad occupation groups, we find large returns to occupation beyond that to education, which imply that occupation is an important measure of skill besides education. Despite the large changes in the educational composition, there has been no marked change in recent decades in the occupational distribution, except for the increase in the share of managerial and professional women, who did not experience a spectacular rise in the return to their skills. Any theory addressing the changes in the wage and employment structure should also incorporate occupation as a measure of skill.