This project will study the relationship between changes in U.S. earnings inequality and three concurrent changes in the U.S. economy: changes in the demographic composition of the labor force, changes in the composition of output, and changes in the process of production. Using data from the Current Population Surveys and the decennial Censuses, we will evaluate the relative contribution of these three factors by employing an integrated demographic and economic approach. The theoretical framework used in this project is an empirically tractable model of the labor market which allows us to evaluate the contribution of the three factors to changes in inequality. The model captures the effect on equilibrium wages of changes in the supply of any type of labor, changes in the output of any industry, and changes in the production process of any industry. Estimation of the model requires data on wages, industry employment, and industry output in local labor markets over time. The empirical work will begin by reevaluating the trends in earnings inequality using new time-series of cross-sections from the CPS and the Censuses. The project will also conduct shift-share and reduced-form wage regressions, thereby providing a foundation for subsequent empirical.analyses using the theoretical framework. Econometric estimates based on the theoretical model will be used to (1) identify the effect of changes in cohort sizes on earnings inequality, specifically the impact of the baby boom and subsequent baby bust; (2) identify which types of labor have been most affected by the increased competition from foreign manufacturers and the shift in employment toward the service sector; and (3) identify the importance of technological change in the changing earnings distribution.
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