Does skill-based technical change explain growing wage inequality?

John DiNardo (of the University of Michigan) and I were troubled by the
fact that there are a lot of patterns and trends in the labor market
that don’t fit in very well with a skill-biased technical change
explanation. We were motivated to embark on a Don Quixote mission, a
noble cause that wasn’t going to go anywhere [laughs].

One thing we pointed out, for example, is that women are lower skilled
than men, if you take the fact that they have lower wages as evidence
of their skill. The SBTC theory says that people with lower skills
should have slower wage growth than people with higher skills. But over
the 1980s, women did much better than men. It’s also the case that over
the 1990s, women’s relative wages were fairly stable again. So there
was a long period of stability of women’s relative wages, then a period
of convergence of women relative to men that ended in 1991-92, and then
stability again. That’s an important set of trends that SBTC doesn’t
address. SBTC might be consistent with it; it might not be, but the
theory needs a lot of auxiliary hypotheses to work.

The same thing is true with respect to the black/white wage gaps.
Blacks earn less than whites, and many people believe that the reason
they do so is because they’re less skilled. Nevertheless, during the
1980s, the black/white wage differential was stable. It didn’t widen as
people had predicted it might.

Another trend that didn’t fit with the SBTC hypothesis concerns the
relative wages of people with different bachelor’s degrees. There are a
couple of different data sets that collect starting salaries for newly
minted B.A.s. What these data show is quite remarkable. Everyone knows
that the average wage of young college graduates went up over the
1980s. It wasn’t the case, however, that the gains were most pronounced
in engineering or science. They were actually greater for graduates in
the humanities, which doesn’t seem consistent with the idea that there
is increasing demand for technically proficient, computer-savvy people.

…A final puzzle concerned the age structure of the increases in the
relative wages of college versus high school graduates. Wages of young
college-educated workers rose relative to young high school workers,
but for people over age 40 or so, there really wasn’t any change in the
high school/college premium.

Hat tip to Greg Mankiw and Matt Yglesias.