Real wage inequality

By Paul Walker 01/05/2015

Inequality is the trendy topic of the moment. Wage inequality being part of the story. We hear about differences in wage between males and females, skilled and unskilled workers, different racial groups, age groups etc. One point to keep in mind when looking at such results it that they normally involve looking at nominal wages of some kind: hourly, weekly, annual or whatever. But our well being is dependent not on nominal wages but on real wages. What we can buy with our wage is what is important. So what has happened to real wages?

Enrico Moretti has a 2013 paper (“Real Wage Inequality”, American Economic Journal: Applied Economics, 5(1): 65-103) that looks at real wage inequality between skilled and unskilled workers. Where you live and the housing costs that come with your city of choice are a large factor in determining just how much a dollar of wages will buy. While nominal wage differences between skilled and unskilled workers have increased since 1980, skilled workers have trended to be employed in cities with high housing costs. This fact means that the increase in real wages between skilled and unskilled works is significantly less than the increases in nominal wages. Thus the differences in well being of the two groups is much less than nominal wages would suggest. It would be interesting to see such an analysis done for New Zealand, in particular with regard to housing costs in Auckland.

The abstract for the paper reads:

While nominal wage differences between skilled and unskilled workers have increased since 1980, college graduates have experienced larger increases in cost of living because they have increasingly concentrated in cities with high cost of housing. Using a city-specific CPI, I find that real wage differences between college and high school graduates have grown significantly less than nominal differences. Changes in the geographical location of different skill groups are to a significant degree driven by city-specific shifts in relative demand. I conclude that the increase in utility differences between skilled and unskilled workers since 1980 is smaller than previously thought based on nominal wage differences.