Wage Inequality and Technological Change:

Abstract

The sharp increase in wage inequality that has taken place since the early 1980s in developed countries, especially in the US and the UK, has sprung intense debates among economists. The rapidly growing literature on the subject reßects substantial progress in narrowing down the search for robust explanations, in particular by emphasizing the primary role of (skillbiased) technological progress; yet this literature leaves some important puzzles still open to further inquiry. The Þrst puzzle concerns the evolution of wage inequality between educational groups; although the relative supply of college-educated workers increased noticeably within the past 30 years, the wage ratio between college graduates and high-school graduates rose substantially in countries like the US and the UK between the early 1980s and the mid1990s. In the US, for example, Autor et al. (1998) show that the ratio of “college-equivalents” (deÞned as the number of workers with a college degree plus half the number of workers with some college education) to “non-college equivalents” workers (deÞned as the complementary set of workers) increased at an average rate of 3.05% between 1970 and 1995, up from an average rate of 2.35% between 1940 and 1970. In parallel to these movements in relative supply, the ratio between the average weekly wages of collegeand high-school graduates went up by more than 25 percent during the period 1970-1995, although it had fallen by 0.11% a year on average during the previous period. The second puzzle is that wage inequality has also increased sharply within educational and age groups: in particular Machin (1996a) Þnds that the residual standard deviation in hourly earnings increased by 23% in the UK and by 14% in the US over the period between 1979 and 1993; equally intriguing is the fact that the rise in within-group wage inequality