The other 99%: Trends in US Wage Inequality.

A lot of attention (myself included) has been recently put on the Top 1% income and wealth. However, there is also substantial inequality in the other 99% that is worth exploring. To get an idea, if we took all the Top 1% income growth between 1979 and 2012 and distributed it among the other 99%, each of us (I assume you also belong to the other 99%...) would earn around $7000. However, the increase in the earnings gap between a college-educated and a high-school educated household is four times that in the same period. Hence, here we will focus on wage inequality among the other 99%, but particularly between the bottom 10% and top 90%, so as to exclude the very extreme cases (which deserve a different attention). But first, Figure 1 shows how wages have changed between 1963 and 2005 by wage percentile. Here we see that generally there was a much bigger increase in wages among the top half than the bottom one.

Figure 1: Change in real wages by percentile, 1963-2005.

A common measure for overall inequality is the ratio of those at the 90 and 10 percentiles. A typical issue is that the population might be changing its structure, with more people getting educated or more work experience. As this happens, the typical person in either of these percentiles might be changing, hence changing our standard interpretation of increasing inequality. Another take on inequality is to look at between-groups inequality, where the typical comparison is those with a college degree and those with a High School degree. This tries to avoid the issues of other characteristics of the population changing as in the overall inequality measure. However, another alternative look at inequality is to look within-groups, hence evaluating how much variation there is among small groups (for example: college educated, 25-30 years old, male). This three measures of inequality are displayed in Figure 2, where we see that even though the three of them have increased over the long haul, they have done so at different paces and through different paths. Particularly the college premium follows a strange path, increasing in the 1960s, decreasing in the 1970s and increasing very fast since the 1980s. This suggests that a simple, unique explanation for the recent increase in inequality is not likely to work. 

Figure 2: Three measures of Income Inequality.

But has inequality changed more among the top or the bottom? An easy way to look at this is to compare the 90 and 50 percentiles (upper-tail inequality) and, separately, the 50 and 10 percentiles (lower-tail inequality). Note this still excludes the very bottom and very top. Figure 3 shows that even though lower-tail inequality grew in the 1980s, it has not grown since then. On the other hand, upper-tail inequality has increased continuously.

Figure 3: Upper- and Lower-Tail Inequality.

So what is behind this monumental increase in inequality? Identifying the cause of this change is very hard or probably impossible, but what we can do better is identify the proximate causes, meaning what seems to be closely associated with this change, even if we do not understand what led to the first thing. And this is where the skills of economists Autor, Katz and Kearney comes into play. They argue that we cannot simply think of people as belonging to one of two groups - skilled and unskilled - where the top one is associated with higher education. Figure 4 shows that from 1979 to 2005 the wages of those with a post-college education grew by a lot more than those with college degree. Moreover, the difference between those with exactly college and high-school degrees slowed down significantly since the 1980s. And finally, the difference between those with high school degrees and those without one has flattened or even decreased since the mid-1990s. All this suggests that, since the 1990s we are in a situation where the income among the very high- and very low-skilled workers has increased relative to those in the middle. Income has polarized.

Figure 4: Changes in wages by Education.

What explains this? The main hypothesis is that computerization has changed the demand for job tasks and affected the demand for skills in such a way that explains this polarization of income. Computers are good at doing routine tasks which are codifiable, like bookkeeping, clerical work or repetitive production tasks. (If you have interacted with a call-center lately, you will probably know how computers have improved in voice recognition and seem to have taken over those tasks that require gathering the same information all the time). On the other hand, abstract tasks like those performed by "high-skills" managers or educated professionals are hard to automatize since they require cognitive and interpersonal skills and adaptability. Similarly, manual tasks used in many "low-skilled" jobs like security guards, cleaners and servers are hard to computerize and hence have not been affected much by the advance of computers. Figure 5 confirms this intuition that low-skill jobs (taking the average education of those performing such jobs) usually have manual tasks. On the other end, high-skill jobs are mainly filled with abstract tasks. However, routine tasks are concentrated between the 20th and 60th percentiles. 

Figure 5: Task intensity by Occupational Skill.

The conclusion is that the change in wage inequality may be substantially explained by changes in the demand of skills, which has been lately polarized by the introduction of computers. As the demand for these jobs increased, so did their wages. But why haven't workers matched the increase in demand by educating themselves more? Well, most likely this change was very hard to predict and so not enough people found higher-education to be "worth it." However, recent trends in education attainment suggest that young people are catching up to this increased demand.  

Based on an article by Autor, Katz and Kearney.