Working Paper No. 105

The rapid growth in wage inequality and the rising incidence of low earnings in the 1980’s can be traced in large part to the sharp decline in the real hourly wages of lowskill men. This paper examines alternative explanations for this wage collapse. A widely accepted story is that this collapse reflected declining demand (job opportunities) for low-skill jobs, a consequence of biased technological change. The result was skill mismatch: too few low-skill jobs for the low-skill workforce. The evidence described in this paper offers little support for this hypothesis; while substantial shifts in the skill mix of employment took place between 1973 and 1983, there was little skill restructuring after 1983. Crucially, however, it was in this latter period that we observe the highest rates of investment in computer-based technologies by firms in all sectors of the economy. An alternative “shifting wage norms” explanation is proposed. A survey of the evidence suggests that many employers began to adopt low-wage human resource strategies in the late 1970’s. These employment practices undermined traditional wage-setting institutions (collective bargaining, internal labor market norms) that had protected low-skilled workers from the full force of labor market competition. In addition, these practices, together with unprecedented increases in the supply of low-skill foreign workers, resulted in a massive increase in the effective supply of labor competing for low-skill jobs. These developments led to a collapse of wages at the bottom of the wage distribution, a collapse facilitated by a 25 percent decline in the real value of the legal minimum wage in the 1980’s. After rising for almost three decades, the average real weekly earnings of production and nonsupervisory workers fell by 7.5 percent between 1973 and 1979 and by another 12.6 percent between 1979 and 1990. In 1982 dollars, the weekly wage was $327 in 1973, $303 in 1979, $277 in 1982, and just $265 in 1990. ’ This considerable drop in the value of the average production worker paycheck has coincided with a spectacular increase in earnings inequality (Levy and Murnane, 1992; Juhn, Murphy and Pierce, 1993). Indeed, the most highly publicized characteristic of recent earnings trends has been been the widening gap between highly educated and poorly educated workers. Table 1 summarizes real earnings trends since 1973 by gender and educational attainment for full-time year-round workers from the March Current Population Survey files. The Table shows that the wage restructuring of the last two decades consisted of two fundamental developments. First, the real earnings of college educated female workers in the 1980’s grew rapidly (14 percent) in the 1980’s. The second and even more dramatic trend was the massive decline in the earnings of poorly educated men down 25 percent for those with less than a high school and down 16 percent for men with just a high school degree since 1973. As the table shows, while real earnings for these workers fell in the 1970’s, the percentage declines were 3 to 4 times larger in the 1980’s, a decade in which the average earnings of college educated workers increased modestly. The increase at the top appears to be due exclusively to the increased earnings of those with post-graduate schooling. Average earnings for individuals with just a college degree actually fell by 2.3 percent.2 ‘Average weekly earnings (Economic Report of the President,l991, Table B-44) were deflated by the CPI-U index (Table B-58). 2This last figure is for the 1979-91 period (Mishel and Bernstein, Economic Policy Institute, cited in the New York Times, December 13, 1993, p. Dl).