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Home Publications Blogs Beat the Press Wage Inequality: Opening Salvo

Wage Inequality: Opening Salvo

Saturday, 12 January 2013 15:54

Dylan Matthews gets the award for the first news item on the new paper on wage inequality (still in draft form) from my former boss Larry Mishel, colleague John Schmitt, and friend Heidi Shierholz. Mishel, Schmitt, and Shierholz (MSS) take issue with the job polarization explanation of wage inequality, put forward most prominently by M.I.T. professor David Autor. Autor's claim is that the pattern of inequality we have seen over the last three decades can be explained in large part by a loss of middle class jobs, with gains in employment for occupations at both the top and bottom end of the wage distribution.

The MSS paper shows that the shifts in occupational shares don't fit the pattern for trends in inequality very well over the last three decades. They also show that most of the rise in inequality, especially in the last two decades, has been within occupations and not between them. (There are many other issues, it is a 60-page paper.)

I will just note a couple of points in Matthews write-up. He cites Autor as saying that much of the inequality within occupations could be attributable to technical change. This is of course true, but his occupational analysis has nothing to say on this issue. His analysis is designed to show that inequality is driven by changing demand for different occupations. Insofar as inequality is attributable to differences in the demand for workers within an occupation, his occupational shift theory can provide no insight.

The other point is one of motives. Matthews quotes Autor:

"Larry and people in that group hate technical change as an explanation of anything. My opinion about why they hate it that much is that it’s not amenable to policy, ...All these other things you can say, Congress can change this or that. You can’t say Congress could reshape the trajectory of technological change."

While Mishel has made it fairly clear that he considers the technical change argument to be an excuse for not addressing the real causes of inequality, it is possible to turn the question of motives around. The view that inequality is simply the result of technical change and there isn't much we can do about it has plenty of rich and powerful adherents.

For example, the Hamiltion Project, which is largely funded by former Treasury Secretary and Citigroup honcho Robert Rubin, has published many papers that advanced this theme, including this one by David Autor. This doesn't mean that Autor in any way altered his research or his writings to curry the favor of the Robert Rubin crowd, only that substantial incentives do exist to produce research that absolves policy of any responsibility for the upward redistribution that we have seen over the last three decades.

For this reason it is probably best for discussions of inequality to focus on the evidence. In principle we should be able to determine where the weight of the evidence lies. We will probably never know the true motives of the various individuals involved in the debate.  

Comments (12)Add Comment
Technical Change
written by bakho, January 12, 2013 3:41
Even if technical change is a problem, there is plenty a government can do about technical change. In response to Sputnik, the US launched an education effort to improve the level of math and science competency among the future workforce. A government can initiate workforce training. A government can invest in new technology to help startup companies overcome barrier costs. A government can use policy to level the playing field between entrenched "dinosaur" special interests who would other wise block a larger technical workforce. A government can purchase technology and deliver technology (universal broadband example) as a public good, just as US government delivered rural electrification as a public good.
The Real Macro Picture
written by Robert Salzberg, January 12, 2013 4:25
Wages have lost around 4% of GDP in the same period of time that finance gained around 4% of GDP.

Seems pretty straightforward where the money has gone from stagnating wages over the last few decades.

written by Kat, January 12, 2013 4:42
One small example. Look at the job of university president.
Has the job changed so much in the past 50 years? What exactly are the new skills needed? Perhaps extorting more money with the claim you're going to be snapped up by the private sector is the new "skill".
written by Chris Engel, January 12, 2013 5:34

The executive remuneration bubble is one that I fear will never pop.

Half of these guys got ridiculous bonuses riding the wave of productivity growth and market bubbles and got credit merely because they didn't commit outright fraud to rob the machine that was already running fine.

Guys like Welch and others who created the MBA-bubble of "let's all be CEO's"! which gave managers way too much credit for wealth that workers were creating, have created a beast that shows no sign of weakness going forward.

The ironic part is that there's plenty of talent that meets the requirements and needs for a company being run, but shareholders and Boards are totally drinking the koolaid on the idea that you just HAVE to pay out the ass for "talent" in management.

Of course networking and connections are important, but there's no way managers are responsible for all the added value and wealth we saw created since the 80's. And it's ridiculous that they keep demanding higher wages and even if you're CEO of a failed company you are still in the headhunter databases as someone who is "in the know".
lies, damn lies, statistics
written by Jennifer, January 12, 2013 6:16
It is always interesting who feels the need to engage in personal attacks and who does not. The graph that Mishel considers full of noise-it illustrates the relationship between employment skills and employment, indeed does not look terribly convincing. It may be that advanced statistical techniques bring out a close relationship demonstrating the viewpoint Autor is claiming. It is important to remember that statistical analysis just tells you the odds that the relationship is not due to chance, not that it is meaningful. If the relationship was really that strong it would be easier to see.
How to compensate for wage inequality
written by ChuckL, January 12, 2013 9:23
Here is my stab at how to compensate for wage inequality: we need to make paid time off (aka vacation, personal and sick time) mandatory and increase it as labor productivity goes up. In addition, Social Security should be expanded to include a defined benefit pension plan. The unused paid time off in any given year could be used to fund this option.

We really need to consider this type of policy option if the human race is to have any kind of meaningful future. Do we really want a world where 1% of the potential workforce produces all of the manufactured goods and 95% of the profits go to 2% of the population leaving the rest of the population to exist by barter in huge urban ghettos?
Within Occupation Wage Inequality
written by TVeblen, January 12, 2013 10:51
I'd like to hear a bit more about within occupation wage inequality. The two-tier wage system adopted by the airline industry back in the 1980s is now standard practice and college teaching is now done mostly by adjuncts at the CC level and 40% at 4-year colleges. Go down the list of "professions" and the picture becomes clear. I think technological change has differential impacts on these same occupations: some times it is labor displacing and sometimes it is labor augmenting. In the longer run, I think both Marx and Schumpeter saw that the latter effect would dominate. The bigger question is how can workers claw back the past gains from increases in labor productivity that have already paid for a shorter week and higher real wages.
The problem with the "skill-biased technological change" argument is that...
written by LSTB, January 13, 2013 8:11
...It ineluctably leads the researcher to conclude that the solution to a future labor market populated by Eloi lawyers and Morlock material movers is to send the Morlocks to college and deny the existence of any material movers who happen to have law degrees but couldn't find high-paying lawyer jobs.

People like Autor think it's impossible to increase wages for the Morlocks. It's depressing that his pessimism pervades even the elite levels of government, including the Treasury and Education departments.
written by Peter K., January 13, 2013 10:02
"The view that inequality is simply the result of technical change and there isn't much we can do about it has plenty of rich and powerful adherents."

This a common theme with conservatives throughout history across many different societies. In the recent Tarantino movie "Django Unchained" DiCaprio's plantation owner is a believer in phrenology which employs the scientific "evidence" of skull shapes to demonstrate that blacks are by nature submissive and therefore slavery is just and right.
The Bosses Pay Themselves Too Much
written by greg, January 13, 2013 8:18
The bosses decide who gets paid and how much. To say it is otherwise is absurd.

If they pay themselves too much, not only is there increased wage inequality, but there is increased unemployment and decapitalization of the labor force.

The bosses pay themselves too much, as I show at:


If 7.5% less of the national income went to the top 1%, there would be ‘full’ unemployment, a more equitable distribution of income, and a more robust economy.

Oops, meant 'full' employment, not unemployment
written by greg, January 13, 2013 8:25
Oops, meant 'full' employment, not unemployment
written by tom michl, January 14, 2013 8:42
re: "it is possible to turn this question around."

I think we can make this point even more emphatic. The question itself gets bias backwards. It is the econ profession that suffers from an unaknowledged ideological bias that truncates the debates by crowding out alternative theoretical frameworks.

In this debate, Autor and company work within a neoclassical framework that virtually requires them to seek technological explanations when wage inequality does not conform to observable changes in the supply of skills or workers. The alternative tradition, drawing on Institutionalists, Marxists, Labor Market Segmentation theory, does not have this problem, and arguably has a better, albeit not as tight, explanation. There is a book on European unemployment edited by David Howell (see his introduction) that elaborates this in a different but related context. (Dean was a coauthor of one of the more significant chapters, I think.)

It is somewhat discouraging that the accusation that Mishel et al are somehow 'biased' while the professional economists are avatars of objectivity is coming from journalists. One would think that there are some journalists who have a less naive view of the econ profession. Didn't anyone watch Inside Job?

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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.