Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 6 The Economics of Labor Markets
Chapter 19 of 36 Earnings and Discrimination
Section 4 of 16
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Studies have shown the earnings gap between workers with high skills and low skills has increased over recent decades.
Table 1 gives comparative data on the average earnings of college graduates and high school graduates.
For men
· in 1980, a man on average earned 44 percent more with a college degree than without one
· by 2005, this figure had risen to 87 percent
For women
· in 1980, a woman on average earned 35 percent more with a college degree than without one
· by 2005, this figure had risen to 72 percent
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Why has the gap in degree/no-degree earnings widened in recent years?
Economists have proposed two hypotheses, both suggest the demand for skilled labor has risen over time relative to the demand for unskilled labor.
This shift in demand for skilled labor has led to a corresponding change in wages, which in turn has led to greater inequality of wages.
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Why the increasing inequality of wages between lower and higher skilled workers?
#1: increased international trade.
In recent years the amount of trade with other countries has increased substantially.
As a percentage of total U.S. production of goods and services
· imports have risen from 5 percent in 1970 to 16 percent in 2005
· exports have risen from 6 percent in 1970 to 11 percent in 2005
Unskilled labor is plentiful and inexpensive in many foreign countries.
So, the United States tends to
· import goods produced with unskilled labor
· export goods produced with skilled labor
Therefore, when international trade increases, the domestic U.S. demand for skilled labor rises and demand for unskilled labor falls.
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#2: advances in technology.
This includes advancing computer technologies, which raises the demand for computer-skilled workers and lowers demand for those who are not.
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Why do increased international trade and advances in technology increase the inequality of wages between lower and higher skilled workers?
ChatGPT:
International Trade
Caused by comparative advantage trade shifts production toward what each country does best.
Advanced economies like the U.S. have a comparative advantage in high-skill, high-tech industries e.g. finance, software, advanced manufacturing.
Developing countries often specialize in lower-skill, labor-intensive production such as of low price consumer goods.
Impact on wages:
High-skill workers in rich countries benefit because their skills are in demand in global markets.
Low-skill workers face competition from cheaper foreign labor, which pressures wages downward or shifts jobs overseas.
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Technological Change
New technologies such as automation, computerization, AI, robotics are typically skill-biased: they increase the productivity of educated, high-skill workers but replace routine, low-skill jobs.
Examples:
A factory robot can replace several assembly line workers, but a robotics engineer or programmer becomes more valuable.
Computers reduce the need for clerks and typists but increase demand for data analysts, designers, and managers.
Impact on wages:
High-skill workers see their wages rise, since technology makes them more productive.
Low-skill workers risk wage stagnation or job loss, since technology can substitute for their tasks.
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Combined Effect
Both globalization and technology amplify demand for educated, adaptable workers while reducing opportunities for workers with fewer skills.
This leads to:
Rising wage inequality between college-educated vs. non-college-educated workers.
“Hollowing out” of the middle class, as the number routine jobs including clerical and assembly line jobs decline while both low-wage service jobs and high-wage professional jobs expand.
Simply, international trade and technological advances widen wage inequality because they raise demand and pay for higher-skill workers because their value increases and reduce demand and pay for lower-skill workers because their value decreases.
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