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Will Inequality Continue to Rise?

The sharp rise in earning inequality and the virtual stagnation of the average real wage in the United States since the early 1970s are matters of intense public concern. The weight of evidence suggests that the principle cause is an increase in the rate of extensive skill-biased technological change. But will this trend continue? It is possible that as computer technology becomes better able to perform more sophisticated tasks, the effects of technology will change direction so that unskilled workers can become more efficient in jobs that were formerly done by today s skilled workers. For example, insurance agents are reportedly concerned about the implications for their future earnings of the new ability of customers to purchase their policies through the Internet. This would represent the reverse of extensive skill-biased technological change; high school graduates could perform most of the necessary labor functions with computerized purchases. If practices of this sort become fairly widespread in the future, the relative demand for skilled labor will not shift to the right as rapidly as rapidly as it has in the recent past and might theoretically even shift back to the left.

But while one can offer possible examples in particular industries of the technological bias turning in favor of unskilled workers, it would be unwise to stake too much on a movement of this sort reversing the trend toward greater inequality. After all, the demand function for high-skilled labor has been shifting to the right fairly consistently for a long time. Based on the post-World War II experience in the United States, it is highly unlikely that it will not continue to do so. The only realistic question is whether the pace of change will be as great as it has been during the past 25 years.

It is difficult to think of policies that would halt this technological shift for example, imposing a large tax on computers? and even if such policies could be put in place, they should not be. Thus, public policies to do something about earnings inequality have focused on other proposals, like a large increase in the minimum wage, government training programs, import restrictions, tax rate reductions for rich old people, and so forth. While this paper is not the place for a review of these choices, it is fair to say that most of the available options either present potentially undesirable side effects or may work only very slowly or not at all, or all of the above.

Will the supply side of the economy adjust to reduce the amount of inequality? There has been a fairly steady rightward shift in the educational distribution in the United States over the past half-century. The trends shown in Table 1 imply that the relative supply of college/high school equivalent labor has grown at an average annual rate of 2.9 percent. Further, one might suppose that the huge increase in the private rate of return to investment in a college education associated with the rise in the college/high school relative would cause a large increase in the relative supply of college graduates, which could eventually reduce the wage premium of high-skilled labor. This is the story implicit in Figure 1, in which the vertical short-run relative supply function shifts over time the same amount as the relative demand function so that, in the long run, Returns to R. If this story were correct, the rise in inequality would be a relatively temporary event that is, lasting perhaps another decade or two which might not require policy intervention.

There is some supply adjustment in the pipeline, judging from the time series data on the educational attainment of young adults and of the proportion of college-age persons enrolled in school. For example, the proportion of 20-to 21-year-old males enrolled in school rose from 31.6 percent in 1979 to 42.6 percent in 1993, while the value of R increased by 17.7 percent. The implied relative supply elasticity is 1.7, which is in line with previous estimates of this parameter (Freeman, 1986). This value, however, is not nearly large enough to yield the 3 to 5 percent rates of growth of relative supply depending on whether the next 15 years is like the 1950-1980 or the post-1980 period necessary to keep up with the likely technologically induced shifts in future demand for high-skilled labor.

In addition, much of the past high rates of increase in the relative supply of educated labor were due to the replacement of old people with a low average level of schooling by young persons with a high average level. Beginning around 2010, the average level of education of labor force exiters will be quite high, reflection in part the large boost in the number of students who attended college in the 1960s, probably in part because it was a way to defer military service. For the relative supply of educated labor to grow rapidly after 2010, rates of college attendance will have to be extremely large to avoid a new bout of wage inequality.

It would seem, therefore, that a long-term commitment to increasing greatly the fraction of individuals who go to college is the appropriate public policy response to the phenomenon of increasing inequality. But this is more easily written than done

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