Among the most striking changes in the U.S. economy over the past 50 years has been the growth in the service sector. In 1950, 46 percent of workers were employed in the service sector, by 1970 that figure had risen to 64 percent and by 2000 to 76 percent. Over this period, the relative wage of service workers to goods workers has remained roughly constant. Between 1968 and 1991 the average real hourly wage in the service sector relative to that in the goods sector ranged from .88 to .91, although there has been some upward trend in the 1990's. In addition to these large sectoral changes in employment, the composition of the workforce by gender and education have also changed markedly. Between 1968 and 2000, the proportion of total annual hours worked supplied by female workers increased steadily from 28 to 42 percent. Similarly, over the same period the mean level of completed schooling has increased by about 2 years; the proportion of high school graduates increased from a little over a half to over 80 percent and the proportion of college graduates from 10 to 25 percent. While movements in relative wages by sector were relatively small, changes by education and by gender have been more pronounced. The female to male hourly wage ratio began a steady rise around 1980 from about .61 to about .75 in the mid-90's. The ratio of the hourly wage of college graduates to high school graduates similarly rose steadily from1.4 in 1980 to 1.75 by 1995. The general thesis of this proposal is that these changes, in sectoral employment, in the composition of the workforce by education and gender, and in the pattern of wages are all related phenomena. The literature had generally treated these in isolation. The goal is to specify and estimate a competitive multi-sector general equilibrium model of the U.S. economy that incorporates the demand and supply factors postulated in the literature to have been responsible for these changes in order to understand better their fundamental causes. The model assumes a spot-market competitive equilibrium. It builds on a long tradition of prior work. It extends Heckman and Sedlacek's (1985) static model of sectoral choice in the presence of skill heterogeneity to a dynamic choice setting, adopts the partial equilibrium dynamic schooling and occupational choice framework of Keane and Wolpin (1997), and extends the general equilibrium formulations of Lee (2001) and Heckman, Lochner and Taber (1998) to allow for sectoral choice and aggregate shocks. The model will be used to address the following issues. 1. To quantitatively assess the relative importance of the separate demand and supply factors in the growth of the service sector and the observed persistence in inter-sectoral wage differentials. 2. To quantitatively assess the relative importance of demand and supply factors in explaining increased education and the college wage premium. 3 To quantitatively assess the relative importance of demand and supply factors in explaining increased female employment and the narrowing of the gender wage gap. Broader Impact: The research will be disseminated through publications in academic journals and through presentations at conferences such as the annual meetings of American Economic Association and the Econometric Society. The research findings, as they pertain to understanding the role of technical change and the determinants of skill acquisition, will be of broad societal interest and value.
