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slides_07_schooling_RDRS_class.pdf

slides_07_schooling_RDRS_class.pdf - Econ 473 Class 07 Wage...

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Econ 473 Class 07 Wage inequality and Schooling Choices, or the Race between Education and Technology
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Wage inequality Last class: Four facts on wage inequality (AKK): 1. (a) For men, wage inequality increased above the 30th percentile, almost linearly. For women, wage inequality increased throughout. (b) Differences between men and women narrowed. 2. (a) Upper-tail inequality increased continuously since the early 80s. (b) Lower-tail inequality increased slightly in the 70s, steeply in the early 80s, but then stopped. 3. The constant-composition College/HS gap (a) declined in the 70s, (b) rose sharply in the 80s and slightly less quickly in the 90s. (It also grew in the 60s, when overall inequality didn’t change much.) 4. Residual inequality started growing continuously from ca. 1975.
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Potential explanations for wage changes I Changes in relative demand driven by technological change, trade or structural change I Changes in relative skill supply I Changes in wage-setting institutions (decline of unions) I Erosion of the real value of the minimum wage
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Potential explanations for wage changes I Changes in relative demand driven by technological change, trade or structural change I Changes in relative skill supply I Changes in wage-setting institutions (decline of unions) I Erosion of the real value of the minimum wage Observed changes in wages, in particular the return to skill, could be due to any of these. Therefore, next, understand how demand and supply changes affect wages.
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Today 1. Determinants of wage inequality: a supply and demand framework 1.1 Theory 1.2 Empirics (AKK) 1.3 Replicate AKK’s results in Stata Slides for your background reading: 2. The Mincer equation 3. The evolution of schooling attainment
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The Mincer equation
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How do people choose schooling?
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How do people choose schooling?
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How do people choose schooling? Adam Smith: “A man educated at the expense of much labour and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labour, will replace to him the whole expense of his education, with at least the ordinary profits of an equally valuable capital.” (The Wealth of Nations, page 101.)
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How do people choose schooling? Adam Smith: “A man educated at the expense of much labour and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labour, will replace to him the whole expense of his education, with at least the ordinary profits of an equally valuable capital.” (The Wealth of Nations, page 101.) Schooling/training is an investment decision, people acquire human capital.
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Costs and benefits of education Benefits: I earnings I enjoyment of education itself, of jobs it gives access to Costs: I Tuition, books...
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