Lazear vs Krugman
By Greg Mankiw
CEA Chair Eddie Lazear in May 2006:
"While there is no doubt that some people have been left behind, and that those left behind are certainly a major concern for all of us, there is some good news in this picture. The good new is that most of the inequality reflects an increase in returns to “investing in skills” – workers completing more school, getting more training, and acquiring new capabilities."
NY Times columnist Paul Krugman yesterday:
"There's a persistent myth, perpetuated by economists who should know better -- like Edward Lazear, the chairman of the president's Council of Economic Advisers -- that rising inequality in the United States is mainly a matter of a rising gap between those with a lot of education and those without."
I am not sure what other "economists who should know better" Krugman is referring to. Maybe Daron Acemoglu, MIT professor and winner of the John Bates Clark award. Daron wrote in the Journal of Economic Literature a few years back:
"The recent consensus is that technical change favors more skilled workers, replaces tasks previously performed by the unskilled, and exacerbates inequality. This view is shaped largely by the experience of the past several decades, which witnessed both major changes in technology, including the rapid spread of computers in workplaces and in our lives, and a sharp increase in wage inequality. In the United States, for example, the college premium—the wages of college graduates relative to the wages of high-school graduates—increased by over 25 percent between 1979 and 1995."
My understanding is that there is a widespread consensus that the returns to education have risen substantially over the past few decades. But the education wage premium is not the whole story, as wage inequality within education categories has also increased substantially. Here is an attempt to explain the second piece of the puzzle, from Thomas Lemieux in the most recent issue of the American Economic Review:
"This paper shows that a large fraction of the 1973-2003 growth in residual wage inequality is due to composition effects linked to the secular increase in experience and education, two factors associated with higher within-group wage dispersion. The level and growth in residual wage inequality are also overstated in the March Current Population Survey (CPS) because, unlike the May or Outgoing Rotation Group (ORG) CPS, it does not measure directly the hourly wages of workers paid by the hour. The magnitude and timing of the growth in residual wage inequality provide little evidence of a pervasive increase in the demand for skill due to skill-biased technological change."
That is, part of the increase in inequality is measurement error, and part of the increase is attributable to the fact that the labor force is older and more educated--characteristics that are associated with higher residual variance. |
