Demographics, Sectoral Change, and Changing Relative Wages: A Regional Approach

by Lynn A. Karoly, Jacob Alex Klerman


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Since the mid-1970s, U.S. wage inequality has increased sharply. While there are many possible explanations for this increase, previous attempts at explanation have been limited by the small numbers of degrees of freedom in the aggregate time-series data. In this paper, the authors reexamine the relative importance of various explanations of the increase in wage inequality using a time-series of cross-sections of data on local labor markets, greatly increasing the number of degrees of freedom and the authors' ability to distinguish secular change from true structural causes of increasing earnings inequality. The authors disaggregated results confirm earlier analyses suggesting the importance of changes in the relative supply of education groups, unemployment, and unionization; but the authors find little evidence for the importance of changes in the sectoral composition of output.

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