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The Mysteries of Labor Composition

Monday, 14 March 2011 11:10

David Leonhardt had a blogpost last week that left some of us here at CEPR stumped. It had two graphs, one on top of the other, showing patterns in wages since the start of the recession. The top graph showed wage gains by educational attainment. This showed that college grads had an increase of about 1.5 percent in their real weekly earnings, while everyone else saw modest declines. The second graph showed real wage growth by income cutoffs. Those at the 90th percentile saw real wage gains of 8.0 percent, but everyone else also saw modest wage gains as well.

At first glance, these seemed inconsistent and we thought that Leonhardt had made a mistake. After checking his data, we saw that he was exactly right. The explanation was a change in the composition of the employed workforce. There was a sharp drop in employment among workers without high school degrees and those with just a high school degree between 2007 and 2010. On the other hand, the number of people employed who had advanced degrees actually increased slightly.



Source: Bureau of Labor Statistics.


What happened here is that the change in composition means that much of the bottom portion of the workforce is no longer employed. Therefore the 90th percentile worker in 2010, might have been the 92nd percentile worker in 2007. And, in 2007 the 92nd percentile worker earned 6.3 percent more than the 90th percentile worker.

So, what looks like a big rise in wages for higher-end workers is in fact the result of comparing different workers. This is worth keeping in mind. The wage growth at the middle and lower-end of the income distribution in the late 90s looks even better when we consider that many less educated workers found jobs in this period. 

Comments (3)Add Comment
Tom Friedman was Right: It's Education Stupid
written by izzatzo, March 14, 2011 1:16
This also proves that the deep recession is entirely a supply side phenomena driven by the inability of the under-educated to compete in global free markets.

With more training and education the differences in employment between '07 and '10 would have been smaller in the first three employment compositions to look more like the last two.

It's refreshing that Baker has recanted on Keynesian stimulus spending from the demand side for Obama's Competitive Recovery Plan from the supply side. Jeffrey Immelt would be proud.
Friedman is Right Guy is an Idiot
written by J-Bentham, March 15, 2011 12:50
First off, nothing is entirely anything. Second, no, this is not an entirely supply-side phenomenon. Much of this is cyclical. That's why you see unemployment across all sectors, which you would have known if you read CEPR even somewhat regularly. Third, Tom Friedman was also wrong. Education is a red herring. The real reason for wage divergence is because productivity gains have been given to the top one percent and not to the everyone else. Yes, there have been productivity gains, so wages should be higher. This is a result of anti-labor practices since the late '70s, most notably under Reagan, and then with NAFTA, GATT, among other "free trade" agreements. Outsourcing is used to keep wages down; markets are also manipulated to maintain the "reserve army of the unemployed," in ways like cutting the deficit to reduce growth, to bring this full circle.
written by Scott D. Moore, March 23, 2011 4:03
Very good. Yes, it is all about mix in this analysis.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.