June 11, 1997
"Closing the Gap in Wages"
San Jose Mercury News
By Timothy Taylor
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THERE IS SOME intriguing, although preliminary, evidence that America's trend toward greater income inequality has stopped -- at least for a time.

President Clinton's Council of Economic Advisers noted in its annual report this February: ''Although it is too soon to tell whether a break in the long-term trend toward greater income inequality has occurred . . . (from) 1993 to 1995, income gains were observed throughout the income distribution, but the percentage increases were the largest for low-income households.''

The council cited evidence that households in the bottom fifth of the income distribution saw their incomes rise at an annual rate of 3.4 percent from 1993 to 1995, while the top fifth saw an annual increase of only 1.2 percent. When those at the bottom are gaining faster than those at the top, the income distribution gradually becomes more equal.

For evidence on more recent trends, the New York Times reported late last month: ''Over the last 18 months, however, wages at the low end have picked up. Today, they are rising . . . faster, in percentage terms, than the pay of middle-income Americans.'' In addition, an accompanying chart shows the pay of the working poor rising at a faster percentage rate than that of both middle- and high-wage workers during the first quarter of 1997.

The working poor are doing better because the job market has been tight for years; unemployment has been below 6 percent since September 1994, and now is lurking below 5 percent. Businesses are having a hard time finding low-wage workers to hire, and thus are bidding up their wages.

These trends are good news for the economic status of the working poor and their families; good for the government budget because employed workers need less social spending; good for welfare reform, which depends on moving welfare recipients into jobs; and good for those concerned with America's trend toward greater wage inequality. But the good news on inequality is fragile and short-term. It depends on the continuation of this economic upswing, with its attendant low unemployment, while the causes of U.S. wage inequality are long-term.

Think of wage inequality as a race between demand and supply in the labor market. As the U.S. economy evolves toward more advanced technologies and toward management forms that rely on the initiative and inventiveness of workers, employers have steadily increased their demand for high-skilled workers. Greater demand for high-skilled, high-wage workers tends to increase their wages even further.

Most economists believe that the rising demand for skilled workers is the fundamental source of greater inequality in U.S. wages. However, the U.S. educational system is simultaneously producing a greater supply of skilled workers as well. A greater supply of high-skilled workers tends to drive down the wages of such workers, and thus lead to greater equality.

As recently as 1970, for example, a full 36 percent of the U.S. workforce had less than a high school education and just 14 percent had completed a four-year college degree. By 1995, the share of workers with less than a high school education had fallen by two-thirds to 11 percent, while the share of workers with a four-year degree had doubled to 28 percent.

George E. Johnson, a professor of economics at the University of Michigan, has offered some interesting evidence along these lines. He notes that when the supply of college-educated workers increases dramatically -- say, after the G.I. bill following World War II, or after the spurt of college enrollments during the 1960s that was stimulated by those seeking deferments from military service during the Vietnam war -- then the rising supply of skilled workers keeps up with rising demand fairly well, and inequality doesn't rise much. Conversely, when college enrollments are rising at only moderate rates, as they have since the 1980s, then the rising demand for skilled workers outstrips supply, and inequality rises substantially.

Thanks to low unemployment, America is having a respite from growing inequality for a few years. But over time, reducing economic inequality will require an improved educational effort at all levels, from primary school through college, to meet the insatiable demand of the U.S. economy for better-skilled workers.

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