Education and Technological Savvy Can Improve Workers' Pay: St. Louis Fed Analysis

ST. LOUIS — The gap in earnings between the highest paid workers and the lowest paid workers in the United States has been growing for the past 25 years. Analysis by an economist at the Federal Reserve Bank of St. Louis suggests that the cause is an increasing gap between workers within the same industry rather than between workers across different industries.

The analysis was done by Christopher H. Wheeler, an economist at the St. Louis Fed, writing in the May/June issue of The Review, the Reserve Bank's bimonthly journal of economic and business topics. The publication is also available on the Reserve Bank's web site: http://www.stlouisfed.org .

Wheeler said most of the research on U.S. wage inequality can be characterized by three basic points:

1. The overall distribution of hourly and weekly earnings across all workers has grown wider.
2. The wage gaps between workers with different levels of education, especially between college graduates and workers with no more than a high school diploma, have also increased.
3. There's a growing gap even among workers with the same education level.

Wheeler's analysis of the data indicates that most of the inequality does not represent the polarization of the labor force into high-pay industries and low-pay industries. "Regardless of the industry, some workers have done very well while others have not," he said.

While a variety of theories have been advanced to explain these theoriesthe growth of international trade, changes in institutions such as the decline of unionization and the real minimum wage, rising immigration and technological changethere's disagreement as to how significant each is. Wheeler said a general consensus has formed around one particular theory: skill-based technological change (SBTC).

"SBTC," said Wheeler, "suggests that recent technological change has served to boost the wages of skilled workers while depressing the career outlook and earnings for the less-skilled."

Wheeler's analysis reveals that wage inequality within industries tends to be positively associated with two measures of skill-based technological change: the fraction of workers with a college degree and the frequency of computer usage.

"The evidence suggests that earnings inequality in the United States is significantly related to the changing nature of the workplace," said Wheeler. "In particular, industries that employ large numbers of college-educated workers or use sophisticated capital equipment, particularly computers, tend to be exhibit greater earnings inequality. This suggests that new technologies are increasingly augmenting the productivity and pay of those who are highly skilled relative to those who are less-skilled."

He concluded that this inequality may increase as industries continue to hire more highly educated workers and avail themselves of cutting-edge technologies.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

# # #