Why Incomes Grew Less Equal

Perhaps the most worrisome trend in U.S. labor markets in recent decades has been a dramatic widening in the distribution of earnings, as some people's incomes soared while many more lost ground. Most economists have attributed this rise in earnings inequality to such developments as greater global competition, shifts in the economy favoring technological skills, and the waning power of unions.

A study by economists Peter Gottschalk of Boston College and Robert Moffitt of Brown University in the latest issue of Brookings Papers on Economic Activity adds a key element to the equation: rising earnings instability. The study compares individual earnings histories over the 1970s and 1980s of representative samples of white male heads of households, a group noted for relative wage stability. It finds not only that the wage gaps between individuals widened by about 40% in the 1980s but also that the degree to which a person's wages varies from year to year increased markedly through the decade.

Theoretically, such an increase in earnings instability could reflect any of a number of developments: the eroding job market for low-wage earners, the shift away from manufacturing to services, the decline of unions, or widespread corporate downsizing. In fact, the biggest jumps in wage instability did occur among the youngest, least educated, and lowest-paid workers.

But the study also found rising earnings instability among older, better-educated, and highly paid workers. And the same trend occurred among both union and nonunion workers, blue-collar and white-collar types, and those who changed jobs and those who stayed put.

Gottschalk and Moffitt estimate that about a third of the rise in earnings inequality in the 1980s was due to greater earnings instability. Their findings suggest that a chill wind is blowing through U.S. labor markets--one that may be both enhancing business efficiency via greater wage flexibility and heightening insecurity in the workplace.

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