Full Citation

Title: Real Wage Inequality

Citation Type: Conference Paper

Publication Year: 2009

ISBN:

ISSN:

DOI:

NSFID:

PMCID:

PMID:

Abstract: A large literature has documented a significant increase in the difference betweenthe wage of college graduates and high school graduates over the past 30 years. I show that from1980 to 2000, college graduates have experienced relatively larger increases in cost of living, becausethey have increasingly concentrated in metropolitan areas that are characterized by a high cost ofhousing. When I deflate nominal wages using a new CPI that allows for changes in the cost ofhousing to vary across metropolitan areas, I find that the difference between the wage of collegegraduates and high school graduates is lower in real terms than in nominal terms and has grownless. At least 22% of the documented increase in college premium is accounted for by differencesin the cost of living. The implications of this finding for changes in well-being inequality dependon why college graduates sort into expensive cities. Using a simple general equilibrium model ofthe labor and housing markets, I consider two alternative explanations. First, it is possible thatthe relative supply of college graduates increases in expensive cities because college graduates areincreasingly attracted by amenities located in those cities. In this case, the higher cost of housingreflects consumption of desirable local amenities, and there may still be a significant increase inwell-being inequality even if the increase in real wage inequality is limited. Alternatively, it ispossible that the relative demand for college graduates increases in expensive cities due to shiftsin the relative productivity of skilled labor. In this case, the relative increase in skilled workersstandard of living is offset by the higher cost of living. The evidence indicates that changes in thegeographical location of different skill groups are mostly driven by changes in their relative demand.I conclude that the increase in well-being disparities between 1980 and 2000 is smaller than theincrease in nominal wage disparities that has been the focus of the previous literature.

User Submitted?: No

Authors: Moretti, Enrico

Conference Name: Department of Economics Seminar Series

Publisher Location: University of California, Berkeley, CA

Data Collections: IPUMS USA

Topics: Education, Labor Force and Occupational Structure

Countries: United States