U.S. Wages and Salaries, A Decomposition of Wage and Industry Effects: 1978, 1988,

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U.S. Wages and Salaries, A Decomposition of
Wage and Industry Effects 1978, 1988, 1998

• Stephen Cooke8 October 2004 Dept. of Ag .
  Resource Ec. SeminarUC Berkeley

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Summary Slide

• Problem Definition
• Literature review
• The Theory
• Results and Interpretation
• Summary and Conclusions

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Problem Definition
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Per Worker and Per Capita Payments and Growth in
U.S. 1978, 1988, and 1998 (cpi 1998100)
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Per Worker and Per Capita Payments and Growth in
U.S. 1978, 1988, and 1998 (cpi 1998100)
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Per Worker Wages and Salaries in U.S. 1978,
1998, and 1998 (cpi 1998100)
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Table Determining the Source of Lower Wages
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Interpreting the Wage Industry Effects

• Wage effect
• Movement of high quality factors toward or away
  from a region
• Solow (convergence)
• Romer Lucas (divergence)

• Industry effect
• Movement of high value industries toward or away
  from a region
• Heckscher-Ohlin (convergence)
• Krugman (divergence)

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Growth and Trade Policies

• If wage effect is negative, then
• Increase investment in physical and human
  capital, e.g., education and technology
• Primary factors policies (labor vs capital?)
• If industry effect is negative, then
• Increase competitive advantage by improving local
  resources and institutions
• Place policies (urban vs rural?)

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Literature Review
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Hamermesh, Daniel S. and Grant, James.

• "Econometric Studies of Labor-Labor Substitution
  and Their Implications for Policy." Journal of
  Human Resources, 1979, 14(4), pp. 518-42.
• Physical and human capital are complements and
  are jointly substitutable with raw labor.
• Future research should concentrate on
  substitution among workers

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Bluestone, Barry and Harrison, Bennett

• "The Growth of Low-Wage Employment 1963-86."
  American Economic Review., 1988, 78(2 (May)), pp.
  124-28.
• The data suggest a rising low-wage share and
  growing wage polarization, at least after 1979.
• The decline in unionization
• The erosion in the real value of the minimum wage
• The widespread existence of wage concession
  bargaining
• Two-tier wage structures in a number of large
  industries.
• The growing business practice of "outsourcing" to
  achieve lower labor costs
• The secular shift of capital from directly
  productive to overtly speculative investment

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Krueger, Alan B. and Summers, Lawrence H.

• "Efficiency Wages and the Inter-Industry Wage
  Structure." Econometrica Journal of the
  Econometric Society, 1988, 56(2), pp. 259-93.
• Empirically tests and rejects classical
  competitive theories of wage determination by
  examining differences in wages for equally
  skilled workers across industries.
• These findings suggest that workers in high wage
  industries receive noncompetitive rents.

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Bound, John and Johnson, George

• "Changes in the Structure of Wages in the 1980's
  An Evaluation of Alternative Explanations."
  American Economic Review, 1992, 82(3), pp.
  371-91.
• During the 1980's, there were large changes in
  the structure of relative wages, most notably a
  huge increase in the relative wages of highly
  educated workers.
• Our conclusion is that their major cause was a
  shift in the skill structure of labor demand
  brought about by biased technological change

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DiNardo, John Fortin, Nicole M. and Lemieux,
Thomas.

• "Labor Market Institutions and the Distribution
  of Wages, 1973-1992 A Semiparametric Approach."
  Econometrica Journal of the Econometric Society,
  1996, 64(5), pp. 1001-44.
• de-unionization and supply and demand shocks were
  important factors in explaining the rise in wage
  inequality from 1979 to 1988.
• The decline in the real value of the minimum wage
  explains a substantial proportion of this
  increase in wage inequality, particularly for
  women.

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Valletta, Robert G.

• "Effects of Industry Employment Shifts on U.S.
  Wage Structure,1979-1995." Federal Reserve Bank
  of San Francisco Economic Review, 1997, 1, pp.
  16-32.
• Earlier analyses revealed that average earnings
  are lower, and earnings inequality is higher for
  service-producing workers than for
  goods-producing workers.
• During the period 19791995 the results show at
  most a small effect of industry employment shifts
  on growing inequality in male hourly earnings.

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Calmon, Paulo Du Pin Conceicao, Pedro
Galbraith, James K. Cantu, Vidal Garza and
Hibert, Abel.

• "The Evolution of Industrial Earnings Inequality
  in Mexico and Brazil." Rev Development Economics,
  2000, 4(2), pp. 194-203.
• Mexico and Brazil show increases in wage
  dispersion over time, and a strong negative
  correlation is found with the rate of real
  economic growth.

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The Theory
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Hanna and LaCroix Wage and Industry Indices
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Hanna and La Croix Wage Indices
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Contradictory Results

• For both Hanna and La Croix indices
• (Wage index)( Industry index) Total index
• Hanna total index La Croix total index
• However
• Hanna wage index ? La Croix wage index
• Hanna industry index ? La Croix industry index
• Sometimes they are contradictory!
• Needed a consistent and defensible wage index

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Avg. wages as a function ofavg. sector wages
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Wage index derivation

• Assume a continuous, twice-differentiable,
  concave quadratic average wage function in which
  the regions industrial structure is constantW
  ?i(ai0 ai1wi - ai2wi2)
• This functional form implies that skilled and
  less skilled labor are imperfect substitutes in
  all industries.
• Then apply a second-order Taylor series expansion
  to Wf(wi)
• Adapt Shepherd's lemma in which the 1st
  derivative of a logarithmic Cobb-Douglas cost
  function equals the factor share
• Diewerts quadratic lemma the geometric mean of
  two 1st order approximations equals a second
  order measure

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Wage decomposition equation andthe Theil
inequality index (T)

• Total effect wage effect industry effect

W avg. overall wage/job w avg. sector wage/job
s share sectors wage bill u industry effect
i sector time 0..1
Theil inequality index (T)
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Wage and Industry Effects as Substitution and
Output Effects
E0E1 Total effect () E0A Wage Effect () AE1
Industry Effect (-)
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Change in the Theil Inequality index (overall
between sectors, T and wage effect, TF)
Theil (T) effect industry wage effects
Theil wage effect (TF)

• w,/W ratio of avg. sector wage per job to
  overall average
• ni ratio of labor in sector i to overall labor
• i sectors time 0..1
• T ?0, log(n)
• Conceicao Galbraith, 2000, pp. 65, 68

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Results and Interpretation U.S. Wages and
Salaries
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U.S. Wages and Salaries (cpi 1998100)
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U.S. Wage Salaries Wage and Theil Indices 1978
to 1998
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The Fat Epidemic He says its an illusion

• Dr. Jeffrey Friedman (Rockefeller U.)
• Obesity researcher at Howard Hughes Medical
  Institute
• national data do not show Americans growing
  uniformly fatter (NYT 6/8/04, p. D5)
• from 1991 to present the lower end of the
  weight distribution, nothing has changed, not
  even by a few pounds only the massively obese,
  the very top of the distribution is there a
  substantial increase in weight, about 25 to 30
  pounds

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Wage Effects on Avg. Wages

• An across the board proportionate change in wages
  per job (sign - or ) regardless of the
  distribution

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Negative Industry Effects Cause a Decrease in the
Mean

• C. Low value industries that expand (?)(L) ()(
  -)
• (skewed to the right, ?3 0)

• D. High value industries that contract (?)(H)
  (-)()

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Gaussian probability density function
Silverman, B. W. Density Estimation for
Statistics and Data Analysis. 1986
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Summary and Conclusions
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Summary

• I developed a CES average wage function
• Derived 2nd order approximation using Taylor
  series
• CES is exact
• Industry effect seems more important than it is
  because the wage effect has industry effect
  characteristics
• Technology bias
• Substitution of skilled for unskilled labor and
  vice versa within industries
• High skill high wage industries becoming more
  or less socompounds the perception of actual
  industry effect
• Thiel index shows that the negative industry
  effect can result in greater wage equality and
  conversely for the wage effect

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Table Determining the Source of Wage Change
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Growth and Trade Policies

• If industry effect is negative, then
• Increase competitive advantage by improving local
  resources and institutions
• Place policies (urban vs rural?)

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References

• Conceicao, Pedro and Galbraith, James K.
  "Constructing Long and Dense Time-Series of
  Inequality Using the Theil Index." Eastern
  Economic Journal, 2000, 26(1), pp. 61.
• Cooke, Stephen Wage and Industry Effects in
  U.S. Regional Income, 1840 to 1987 A CES Wage
  Index Method J. of Econ. History 63(2003)
  1131-1146.
• Diewert, W. E., Exact and Superlative Index
  Numbers Journal of Econometrics 4(May)115-45,
  1976.
• Hanna, Frank. Contribution of Manufacturing
  Wages to Differences in per capita Income.
  Review of Economics and Statistics 33(Feb.
  1951) 18-28.
• La Croix, Sumner. Economic Integration and
  Convergence A Second Decomposition Method J. of
  Econ. History 59(1999) 773-785.
• Silverman, B. W. Density Estimation for
  Statistics and Data Analysis. London New York
  Chapman and Hall, 1986.
• Theil, Henri. Economics and Information Theory.
  Chicago, Rand McNally, 1967.