Full Citation

Title: Understanding Earnings Inequality in Appalachia: Skill Upgrading versus Rising Returns to Skill

Citation Type: Working Paper

Publication Year: 2007

ISBN:

ISSN:

DOI:

NSFID:

PMCID:

PMID:

Abstract: The Appalachian region is one of themost persistently poor areas of the UnitedStates. A focal explanation for the weakeconomic performance over the years isthe fact that Appalachia has long laggedbehind other regions in terms of the supplyof skilled workers, particularly thosewith higher levels of education attainment,and this lack of skill has perpetuatedpoverty in the region. In recent decades,however, residents of Appalachia havebegun to narrow the gap in education attainment.To what extent this relative skillupgrading in Appalachia has translatedinto higher wages and reduced wageinequality across regions of the countrydepends on changes in the relative returnsto skill. Knowledge of how regionaldifferences in skill levels and returns toskill translate into regional differentialsin economic inequality and developmentis crucial to a better understanding ofwidening inequality in general, as well asfor more targeted policy prescriptions forregional economic development. For example,if the returns to education are thesame in Appalachia as in the rest of thecountry, but education attainment is lowerin Appalachia, then reducing the wagedifferential across regions requires furtherincreases in educational attainment. Incontrast, if both the level of and return toeducation are lower, then policy shouldfocus on increasing the return to education(via the labor demand) as well as thesupply of an educated workforce.In this report we use data from the19802000 Integrated Public Use MicrodataSamples (IPUMS) of the DecennialCensus to decompose changes in thewage levels and distributions of men andwomen within and outside Appalachiaover the past two decades. We estimatestandard human-capital wage equationsfor workers that allow for region-specificdifferences in the returns to skill at boththe means of the region-specific wagedistributions as well as at numerouspercentile points across each distribution.Although our focal emphasis is onwage differences between residents ofAppalachia and those outside Appalachia,we also examine changes in the returnsto skill in urban and rural areas, for boththe country as a whole as well as withinthe Appalachia region; differences in thereturns to skill within and between Appalachiafor states in the Federal ReservesFourth District and within and betweenAppalachia by state, for states within theFourth District that have non-Appalachianregions: Kentucky, Ohio and Pennsylvania.With the wage equation estimates weconduct a variety of counterfactual wagedecompositions to assess whether thechanges in wages within and betweenAppalachia and other regions are due tochanges in the levels of skill attainmentor changes in the returns to skills. Thewage decompositions are based both onstandard methods used in the discriminationliterature for examining differencesin conditional means (Oaxaca 1973), aswell as more recent methods proposed byMachado and Mata (2005) to decomposechanges in wage distributions.We find evidence that the returns toschooling rose dramatically for men andwomen in the 1980s for both regions, butthen declined in the 1990s within AppaUnderstandingEarnings Inequalitylachia relative to the rest of the nation.We also find evidence of a dramatic dropin the returns to experience among menin Appalachia during the 1980s, but anincrease in experience returns amongAppalachian women. With the estimatedcoefficients we decompose changes inthe Appalachian-non-Appalachian wagedifferential into changes due to skill levelsand changes due to returns to skill. Wefind substantial evidence of skill upgradingamong men and women in Appalachiaover the past two decades such that themajority of the regional wage gap in 1980was due to skill level differences whereasby 2000 it was accounted for by differentialreturns to skill.While much of the difference in meanwages is confirmed by the distributiondecomposition, we find that the returnsgap is more important in explaining thepreponderance of low-wage male workersin Appalachia while the skills gap is importantfor explaining the lack of high wageworkers in Appalachia. For women, differencein skill levels and returns appear tobe equally important across the distribution.The gap in skill returns among lowwagemen in Appalachia is largely drivenby changes in the returns to experienceover the past two decades, which couldbe explained in part by regional changesin labor force participation.Our analysis of regional decompositionsbased on urban-rural designationsreaches the opposite conclusion from ouranalysis of Appalachian/Non-Appalachianwage gaps; namely, that the urban-ruralwage gap became increasingly influencedby skill differentials between urban andrural communities. Although the time patternof skill returns between urban and ruralareas is akin to that which we identifiedwith Appalachian/Non-Appalachia, gaps inskills between urban and rural areas rosefaster and accounts for the different results.Because Appalachia contains bothurban and rural communities, skill upgradingin the urban areas has propped up theregion as a whole.At the same time, however, for menwe find that skill shortages remain morepronounced at the high end of the wagedistribution (and in rural America in general),which is borne out in the fact thatcollege completion and advanced degreesin Appalachia are about one-half the rateof attainment in the rest of the country. Tobring Appalachia more in parity with therest of the nation more of her residentsneed to complete post-baccalaureate degreeprogramsa supply-side issuebutbecause skill returns differ policy mustalso focus on the demand-side issue ofdeveloping high skill jobs that encouragehigher-educated Appalachians toremain in the region rather that migrate tohigher returns in other areas of the UnitedStates.

User Submitted?: No

Authors: Troske, Kenneth; Bollinger, Christopher; Ziliak, James P.

Series Title:

Publication Number: 2007-07

Institution: University of Kentucky

Pages:

Publisher Location:

Data Collections: IPUMS USA

Topics: Poverty and Welfare

Countries: United States