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Skill Mismatch and Wage Inequality in the U.S.

This dissertation is an empirical investigation into the distributive effects of overand under-education, defined as market outcomes such that some workers possess skills over or below those required at their jobs respectively. This type of market failure can arise in assignment and search equilibrium settings, as well as in the presence of asymmetric information regarding workers' performance on the job. The existence of permanent and sizable mismatch rates means that returns to education are depressed for over-educated workers and in ated for under-qualified workers. Thus, irreversible decisions to invest in human capital are made in a context of uncertainty regarding the exact outcomes that might arise. As in the Todaro model, where individuals decide whether to migrate to cities based on the expected values of the available alternatives, workers might decide it is worthwhile to keep investing in education even if the probability of finding appropriate employment is falling. The three chapters of the dissertation are entitled: Skill Mismatch and Earnings: A Panel analysis of the U.S. Labor Market," Earnings Inequality and Skill Mismatch in the U.S: 1973-2003," and Employment and Distribution Effects of Changes in the Minimum Wage." Skill Mismatch and Earnings: A Panel analysis of the U.S. Labor Market This chapter examines the effect on earnings induced by a mismatch between workers' skills and the skills actually required on the job. It uses the Current Population Survey (CPS) for the period 1983-2002. The special re-interview methodology of the CPS is used to create a large panel, so that individual heterogeneity can be controlled for. Skill requirements are estimated by the median education level for each 3-digit occupation in the 1980 census occupational classification. The analysis, including the determination of skill requirements, is conducted for males and females separately. Cross-sectional analysis confirms the findings in the recent literature. Returns to required schooling are higher than the returns to attained education in standard earnings regressions. Also, for workers with similar educational attainment, over-education reduces earnings and under-education increases them. Contrary to what other studies have found, we conclude that these results are confirmed after controlling for individual fixed effects. The chapter also investigates which groups are more exposed to mismatch. I use standard probit analysis with over-education and under-education as the respective dependent variables. Women, service sector, and non-unionized workers appear to have higher probabilities of mismatch. Earnings Inequality and Skill Mismatch This chapter shows that skill mismatch is a significant source of inequality in real earnings in the U.S. and that a substantial fraction of the increase in wage dispersion during the period 1973-2002 was due to the increase in mismatch rates and mismatch premia. Standard human capital earnings regressions that do not decompose the education variable into required, surplus, and deficit years provide biased estimates of the relative importance of education in explaining earnings inequality. In 2000-2002 surplus and deficit qualifications taken together accounted for 4:3 and 4:6 percent of the variance in earnings, or around 15 percent of the total explained variance. The dramatic increase in over-education rates and premia accounts for around 11 and 32 percent of the increase in the coeffcient of variation of log earnings during the 30 years under analysis for males and females respectively. Residual inequality is slightly diminished when the estimating equation allows the prices of surplus, required and deficit qualifications to differ but the well-studied increasing trend of within-group inequality remains otherwise unchanged. Changes in the composition of the labor force are found to be important predictors of increasing residual inequality even when skill mismatch is taken into account. The Distributive Effects of the Minimum Wage: an Effciency Wage Model with Skill Mismatch (co-authored with Peter Skott) This chapter analyzes the effect of changes in the real value of the minimum wage on the wage distribution. Changes in the minimum wage and other labor market institutions affect workers in all groups and empirically appear to be good complement to standard supply and demand arguments in explaining overall inequality. We use an effciency wage model but allow for mismatch between jobs and workers. This framework yields predictions not only on the skill premium but also on the extent of inequality within groups. To keep matters as simple as possible, we assume that high-skill workers can get two types of jobs (good and bad), whereas low-skill workers have only one type of employment opportunity (bad). As long as some matches of high-skill workers and bad jobs are sustained in equilibrium, changes in the exogenous variables will affect not only wages and employment rates but also the degree of mismatch. Thus, this paper shows that `over-education' can be generated endogenously in effciency wage models and that a fall in the real value of the minimum wage can (i) reduce total employment, (ii) lead to a simultaneous decline in both the relative employment and the relative wage of low-skill workers, and (iii) produce a rise in within-group as well as between-group inequality. Evidence from the US suggests that these theoretical results are empirically relevant.