The Rise in Inequality

Figure 1 documents the two trends in upward mobility that motivate this study. Compared to the original cohort, long-term wage growth has both stagnated and become more unequal for the recent cohort. Specifically, total growth from ages 16 to 36 has dropped from a mean of 1.06 in the original cohort to 0.94 in the recent, while its variance has increased from 0.24 to 0.44.[4] This is a near doubling of the variance--that is, inequality--in wage growth. Fewer workers now have wage gains in the middle of the distribution, while more workers have either large or low-wage gains. In fact, there is a significant increase in workers who actually experienced real wage losses over the twenty-year period (values below zero).

Figure 1
Change in Permanent (Log) Wages from Ages 16 to 36

These trends in upward mobility mirror those found in cross-sectional wages. It should come as no surprise then that education has played a key role in generating them, as seen in Figure 2. (In this and all subsequent figures, 95% confidence intervals for point estimates are represented by vertical lines, and the original and recent cohort are represented symbolically by a circle and a triangle, respectively.) High school dropouts have seen the strongest decline in mean wage growth in recent years, followed by high school graduates and those with some college experience. For those with associate's degrees, there is no significant cohort difference in wage growth, which is an important point. Apparently, the increased demand for skills and education in the new labor market has not trickled down far enough to affect those holding degrees less than a bachelor's. Conversely, workers who do hold a bachelor's degree or higher have done well, experiencing greater wage growth than in the past.[5] Thus, wage inequality between education groups has grown.

Figure 2
Total Growth in Log Wages from Ages 16-36
Means, by Education Level

We next look within education group and examine the variance (or inequality) of wage growth. Figure 3 shows that the recent rise in inequality holds true for nearly all levels of education group. This means that the growing gap between less- and more-educated young men accounts for only a portion of the overall increased inequality in the recent cohort. So for example, the variance for high school dropouts has nearly tripled, and it has nearly doubled for high school graduates. This increased inequality, when combined with the stagnant wage growth described above, has clearly hurt less educated workers in recent years. Many more are experiencing real wage lossesover the twenty-year period. In fact, over 14% of recent cohort dropouts experienced wage losses, while less than 1% did so in the original cohort. Recall that wage growth is a measure of mobility, so this means that substantial numbers of workers are now stuck on a path that is effectively going nowhere.

But those with more education have not been immune. While bachelor's and master's graduates have experienced real wage growth in recent years, they have also seen growing inequality. The variance in wage growth for bachelor's graduates increased by 60%, and by 72% for master's graduates.

Figure 3
Total Growth in Log Wages from Ages 16-36
Variances, by Education Level

Moreover, the absolute magnitude of these variances in the recent cohort is quite large--education has grown in importance, but it is no longer a guarantee of success to the extent that it once was.

[4] A change in the log wage from ages 16 to 36 of 1.06 indicates that the natural logarithm of the ratio wages is 1.06, so wages at age 36 are exp(1.06), or 2.89, times as large as they were at age 16.

[5] These differences are not statistically significant, in part due to the larger variability in growth.