The Rising Importance of Skill

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The project continues empirical work concerning the dynamics of relative wages. Wage inequality within groups classified by gender, age and education increased enormously during the 1970s and 1980s. Relative wage differentials between groups increased during the 1980s, although patterns for the 1970s are mixed. The rise in returns to a college degree since 1979 and the rose in overall male wage inequality since the late 1960s are two of the most important examples of changing relative wages. Previous work suggests that changes in age and school completion distributions associated with the job market entry of the baby boom cohorts affected wages between groups. After accounting for such effects, the data show a consistent picture of rising skill differential. The three major tasks involve an effort to distinguish between alternative explanations. The first task is to generate additional evidence on relative wage patterns by extending the previous analysis to include females, male/female differentials, to decompose changes into permanent and temporary components, and to attempt to identify those skills that have become more valuable. A second major task is to examine the effects on wage inequality of generalized and sector-specific demand shifts. The third major task includes an extension from wages per se to the interaction between wages and labor force participation. The familiar trends towards decreased participation of men and increased participation of women are coincident with wage changes that support traditional notions of positively inclined labor supply functions. The analysis will be based on a supply and demand framework. Several major data sets will be used in the various subparts of the study - the Current Population Survey, the Panel Survey on Income Dynamics and the National Longitudinal Survey of Youth.