Wage Inequality and Cognitive Skills: Re-Opening the Debate

NBER Working Paper No. 21965

Issued in February 2016

NBER Program(s):Labor Studies



Inequality in the United States is high by international standards, and keeps rising. This is likely to bring significant social as well as economic costs, including lower growth. In this paper, we use the Survey of Adult Skills (PIAAC) to revisit the debate on the relative importance of skills in explaining international differences in wage inequality. While simple decomposition exercises suggest that skills only play a very minor role, demand and supply analysis indicates that the relative net supply of skills could explain 29% of the higher top-end wage inequality in the United States. Our analysis also suggests that skills could explain a substantial portion of the racial wage gap, as well as between individuals from different socio-economic backgrounds. Finally, we find little support for the argument that higher wage inequality in the United States may be compensated for by better relative employment outcomes of the low-skilled.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w21965

Published: Wage Inequality and Cognitive Skills: Reopening the Debate, Stijn Broecke, Glenda Quintini, Marieke Vandeweyer. in Education, Skills, and Technical Change: Implications for Future US GDP Growth, Hulten and Ramey. 2019

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