The general perception is that wage inequality in the U.S. has widened significantly in recent decades. And that's certainly true when one considers the gap between those with college degrees and those with high school diplomas or less. From 1979 to 1995, the average difference between the earnings of high school and college graduates expanded from about 33% to 50%.
As economist Robert I. Lerman of the Urban Institute notes in a recent analysis, however, this trend doesn't necessarily mean that overall earnings inequality is rising sharply. For as the evolving economy has placed increasing emphasis on skills, the behavior of both workers and employers has inevitably changed.
On the supply side of labor markets, rising wage premiums attached to education have encouraged workers to expand their skills and training. Fewer students have been dropping out of high school, and more have gone beyond high school. And the share of college graduates in the U.S. workforce has climbed from 18% in 1979 to 25% in 1995.
Some of this educational upgrading has tempered overall inequality. Since 1979, for example, the percent of total hours worked in the economy by high school dropouts has fallen from 21% to 11%, but this decline was offset by a similar rise in hours worked by those with a few years of college. Because dropouts' wages run far below average while wages of those with some college are close to average, this shift tended to reduce wage inequality in the workforce.
Meanwhile, on the demand side of labor markets, many employers in need of workers with skills have found that other characteristics such as gender or race no longer matter as much as they once did. Lerman's data indicate that the overall male-female wage differential shrank from 37% in 1984 to 24% in 1995 (though it is still about 32% among high school dropouts). At the same time, the wage gap between white and black males narrowed from 26.7% to 18%, and that between white and black females fell from 8.7% to 6%.
Indeed, Lerman's analysis suggests that overall wage inequality in the workforce hardly increased from 1984 to 1995. Although a rising educational wage gap tended to boost inequality, this effect was nearly offset by the tendency of employers to discriminate less on the basis of sex and race.
None of this means that wage inequality is an insignificant problem. Lerman notes that it grew appreciably from 1979 to the mid-1980s and that his analysis excludes those who have dropped out of the workforce entirely, especially a rising number of poorly educated black males. What his findings do suggest, however, is that an era of declining wage inequality may be closer at hand than many people believe--if America decides to make the investments in education and job training that could bring it about.