Why The Wage Gap Just Keeps Getting Bigger

Despite recent volatility in capital markets, the American economy continues to outperform expectations. Growth remains strong, the unemployment rate hovers around a 24-year low, and inflation is quiescent. If, as seems likely, the "Goldilocks" expansion continues through June of next year, it will go into the record books as the longest of the 20th century. But if the overall performance of the American economy has been decidedly strong, the gains in income enjoyed by the majority of American workers have been decidedly meager.

The real compensation of the median worker was actually about 3% lower in 1997 than it was in 1989, even though growth was solid in 1996 and 1997. The real income of the median family fared somewhat better, regaining its 1989 level by 1997. But this came about because the median family in 1997 worked more hours, equivalent to about six full-time weeks.

Why has the share of the nation's income going to the bottom 60% of American families continued to fall, while the share going to the top 5% has reached a postwar high? Why are Americans continuing to grow apart economically during the current expansion when they grew together during an otherwise comparable expansion in the 1960s?

Although strong profits suggest that a shift in favor of capital income at the expense of labor income may provide the answer, the evidence strongly indicates that this is not the case. The share of corporate profits in national income has increased but remains lower than it was throughout most of the 1960s.

PLAYERS. This expansion, like its 1980s predecessor, has diverged from history in at least one important respect: The higher one goes up the wage distribution, the larger the rise in pay. In fact, the two groups that have won the largest pay increases during this expansion are CEOs and professional basketball players. Only workers above the 75th percentile of the wage-and-salary scale have enjoyed significant real increases in their take-home pay. The result has been growing inequality in the distribution of wages and salaries both between and within occupations, skill levels, age cohorts, and educational categories.

By far the most important determinant of the growing inequality in labor incomes has been the increasing demand for workers with a high level of skills, particularly those with a college or graduate degree. Such workers, who accounted for only 26% of the workforce in 1997, have experienced the largest increases in compensation. In contrast, workers with a high school education or less, who accounted for about 44% of the 1997 workforce, have continued to see the real value of their earnings erode over time.

Changes in the workplace due to the Information Revolution probably explain the growth in earnings inequality among workers in the same educational category. To use such technologies well requires high levels of initiative, analytical capability, and communications skills, characteristics that are unevenly distributed among individuals with the same formal education.

CONSTRAINT TO GROWTH. The value of a college degree to future income has not been lost upon America's youth. The percentage of high school graduates enrolling in college has climbed from 52% in 1970 to about 66% today. That's good news for both American parents (like me), who worry about their children's future, and for American producers, who rank a skills shortage as the major constraint to growth, according to a recent study by the Council on Competitiveness. But there is some disturbing news as well.

Nearly one-third of all beginning college students require remedial courses in one or more subjects. The percentage is even higher at community colleges, in which about 50% of students begin their college careers. Clearly, many K-12 school systems, especially those in poor inner-city and rural districts, are not providing students with adequate skills in reading, writing, and mathematics. This is an important reason why college enrollment and completion rates are considerably lower for poor children. Children from families in the top 60% of the income distribution account for the entire rise in college enrollment during the past 20 years.

If the benefits of economic expansion are to be shared more equitably, then the share of the workforce with a college education must continue to grow. This, in turn, requires that future workers have the training and financing options they need to obtain a college degree regardless of family income. We've made progress on the college-finance problem through Pell Grants and student-loan options, but much more must be done to improve K-12 school systems.