The Rise in Wage Inequality by Level of Education, 1975 to 2008

Gerald Mayer
Analyst in Labor Policy

Wage inequality in the United States has increased in recent decades. The average earnings of more-skilled workers have increased relative to the average earnings of less-skilled workers. For a period during the 1980s, the average real hourly earnings of men with less than a college education declined. Average earnings do not show how the earnings of individual workers or workers in different occupations or industries may have changed.

The increase in wage inequality has been due mainly to shifts in the relative supply of and demand for workers with different skills. Individual skills include educational attainment. From 1975 to 2008, the supply of more-educated workers increased relative to the supply of lesseducated workers. Over the period, the percentage of workers who completed at least four years of college increased steadily, while there was an appreciable decline in the percentage of workers with a high school education or less. Nevertheless, in 2008 8.8% of workers (10.6% of men and 6.6% of women) had not graduated from high school. Among workers with less than a high school education and workers with an Associate's degree or some college, the rate of improvement in educational attainment has slowed.

From 1975 to 2008, average real hourly earnings increased for workers at all educational levels. Despite the increase in the relative supply of better-educated workers, wage inequality increased between workers with different levels of education. Inequality also increased among workers with the same level of education. These findings suggest that several factors may be responsible for the slower growth in real earnings for less-educated workers and the rise in wage inequality by level of education.

Factors that may account for the relative increase in demand for skilled workers include changes in technology, shifts in the economy from goods-producing to service-producing industries, deregulation, and globalization. In addition, earnings may have been affected by the decline in unionization and lower real value of real minimum wage rates.

Policies to raise the level of real earnings or reduce inequality include both macroeconomic and microeconomic policies. Specific policies may work best in combination with other policies; for example, improving the skills of American workers may work best in combination with policies to increase the demand for workers.

The level and distribution of earnings are affected by economic conditions. Macroeconomic policies that reduce unemployment, or maintain low unemployment, can raise the earnings of less-skilled workers.

Real earnings generally rise with increased labor productivity—through higher current wages, lower prices for goods and services, or both. General policies to increase productivity may include efforts to raise both private and public saving, expand investment in human capital, and encourage the development of technology.

Wage inequality may be reduced through either direct or indirect policies. Indirect policies include efforts to expand the income-producing human capital of lower-skilled workers (e.g., education, health care, and job training). Immigration policy can also affect the supply of workers with different skills. Direct policies to reduce inequality include progressive taxation and income transfer programs.


Date of Report: July 20, 2010
Number of Pages: 35
Order Number: R41329
Price: $29.95

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