Economics » Poverty and Economic Inequality » Income Inequality: Measurement and Causes

A Shift in the Distribution of Wages

Causes of Growing Inequality: A Shift in the Distribution of Wages

Another factor behind the rise in U.S. income inequality is that earnings have become less equal since the late 1970s. In particular, the earnings of high-skilled labor relative to low-skilled labor have increased. Winner-take-all labor markets result from changes in technology, which have increased global demand for “stars,”—whether the best CEO, doctor, basketball player, or actor. This global demand pushes salaries far above productivity differences versus educational differences. One way to measure this change is to take the earnings of workers with at least a four-year university bachelor’s degree (including those who went on and completed an advanced degree) and divide them by the earnings of workers with only a high school degree. The result is that those in the 25–34 age bracket with university degrees earned about 1.67 times as much as high school graduates in 2010, up from 1.59 times in 1995, according to U.S. Census data. Winner-take-all labor market theory argues that the salary gap between the median and the top 1 percent is not due to educational differences.

Economists use the demand and supply model to reason through the most likely causes of this shift. According to the National Center for Education Statistics, in recent decades, the supply of U.S. workers with university degrees has increased substantially; for example, 840,000 four-year bachelor’s degrees were conferred on Americans in 1970; in 2009–2010, 1,602,480 such degrees were conferred—an increase of about 90%. In this figure, this shift in supply to the right, from S0 to S1, should result in a lower equilibrium wage for high-skilled labor. Thus, the increase in the price of high-skilled labor must be explained by a greater demand, like the movement from D0 to D1. Evidently, combining both the increase in supply and in demand has resulted in a shift from E0 to E1, and a resulting higher wage.

Why Would Wages Rise for High-Skilled Labor?

The graph shows how wages rise for high-skilled labor even though supply increases. The graph has two upward sloping supply curves, two downward sloping demand curves, and two points of equilibrium.

The proportion of workers attending university has increased in recent decades, so the supply curve for high-skilled labor has shifted to the right, from S0 to S1. If the demand for high-skilled labor had remained at D0, then this shift in supply would have led to lower wages for high-skilled labor. However, the wages for high-skilled labor, especially if there is a large global demand, have increased even with the shift in supply to the right. The explanation must lie in a shift to the right in demand for high-skilled labor, from D0 to D1. The figure shows how a combination of the shift in supply, from S0 to S1, and the shift in demand, from D0 to D1, led to both an increase in the quantity of high-skilled labor hired and also to a rise in the wage for such labor, from W0 to W1.

What factors would cause the demand for high-skilled labor to rise? The most plausible explanation is that while the explosion in new information and communications technologies over the last several decades has helped many workers to become more productive, the benefits have been especially great for high-skilled workers like top business managers, consultants, and design professionals. The new technologies have also helped to encourage globalization, the remarkable increase in international trade over the last few decades, by making it more possible to learn about and coordinate economic interactions all around the world. In turn, the rising impact of foreign trade in the U.S. economy has opened up greater opportunities for high-skilled workers to sell their services around the world. And lower-skilled workers have to compete with a larger supply of similarly skilled workers around the globe.

The market for high-skilled labor can be viewed as a race between forces of supply and demand. Additional education and on-the-job training will tend to increase the supply of high-skilled labor and to hold down its relative wage. Conversely, new technology and other economic trends like globalization tend to increase the demand for high-skilled labor and push up its relative wage. The greater inequality of wages can be viewed as a sign that demand for skilled labor is increasing faster than supply. On the other hand, if the supply of lower skilled workers exceeds the demand, then average wages in the lower quintiles of the income distribution will decrease. The combination of forces in the high-skilled and low-skilled labor markets leads to increased income disparity.

[Attributions and Licenses]


This is a lesson from the tutorial, Poverty and Economic Inequality and you are encouraged to log in or register, so that you can track your progress.

Log In

Share Thoughts