Wage Dynamics and Returns to Unobserved Skill

Lance Lochner, Youngmin Park and Youngki Shin

No 24220, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Economists disagree about the factors driving the substantial increase in residual wage inequality in the U.S. over the past few decades. We identify and estimate a general model of log wage residuals that incorporates: (i) changing returns to unobserved skills, (ii) a changing distribution of unobserved skills, and (iii) changing volatility in wages due to factors unrelated to skills. Using data from the PSID, we estimate that the returns to unobserved skills have declined by as much as 50% since the mid-1980s despite a sizable increase in residual inequality. Instead, the variance of skills rose over this period due to increasing variability in life cycle skill growth. Finally, we develop an assignment model of the labor market and show that both demand and supply factors contributed to the downward trend in the returns to skills over time, with demand factors dominating for non-college-educated men.

JEL-codes: J24 J31 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-lma
Note: EFG LS
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Citations: View citations in EconPapers (7)

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Working Paper: Wage Dynamics and Returns to Unobserved Skill (2017)
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