In just about any economics course, the emphasis is on the real economy. Nominal variables are corrected so we make comparisons between apples with apples. Yet we often do not make these adjustments when we look at trends.
Enrico Moretti has constructed data on the real wage in the US over the past few decades. It is practically common knowledge that nominal wage inequality has risen. But what about real wage inequality? Moretti writes
A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications.
The rise in wage inequality apparently is not large as people have claimed. College educated couples moved to high costs areas and this drove a substantial portion of the rise. I am beginning to wonder if tax cuts or the extent of union membership have an explanatory power when one discusses wage inequality.
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Posted by: Kevin | November 02, 2009 at 06:43 AM