SOCI 235 Lecture Notes - Lecture 17: George J. Borjas, Rational Expectations, Marginal Cost
8 Jun 2018
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SOCI 235 – Technology and Society
Rising Earnings Inequality
Effect of ICT on the kind of labour demanded
• US in particular – since the late 1970s GDP per capita has grown much faster than
median household income
• 2000s – employment growth has been slow or non-existent
o But the decline after 2008 – associated with financial crisis
• Inequality of earnings and income have risen
Why have earnings inequality risen in the US?
1. Skill-biased technological change
• Evidence for this:
o Rising earnings inequality – i.e. Gini coefficients, variance measures, decile
ratios
o Rise in the skill premium – earnings of the avg. college graduate divided by
earnings of avg. secondary school graduate
▪ This may only be driven by one part of the distribution of those with a
college education
▪ Evidence that some jobs requiring a college education are being
replaced by ICT – ex. processors
o People ho use oputes get paid oe tha those ho dot – assumed
that pay rises with skill
2. Measurement error
• Reservations about evidence for skill-biased labour:
o One data source commonly used to estimate trends in earnings of inequality
calculates hourly pay from separately reported annual earnings and annual
hours of work
▪ Data soue does NOT otai diet uestio o the espodets
hourly wage rate
▪ BUT – hourly paid employees – ore error in reported annual hours of
work and annual earnings than in a reported hourly wage rate
▪ This error is likely to be random – measurement error
▪ Random error – increased variability for relevant variable within set
of data
▪ Usual measures of inequality are measures of variability of income, so
increased random error leads to overestimate of earnings inequality
o IF hourly paid workers are poor at reporting annual earnings, there is more
random error in wage rate calculated from their reports, then an increase in
proportion of hourly paid workers over time – results in increased
measurement error and increased measured inequality
o Proportion of hourly paid work has increased over time
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▪ SO, some growth in inequality may be caused by an increasing
amount of random error
• This rise in inequality varies across countries
o Soe outies, it hast ise at all
o But all countries have adopted ICT
3. Freezing of minimum wage in the 1980s
• Strong evidence that rise in earnings inequality in US – due to freezing of min. wage
in the 1980s
4. Effects of trade/direct foreign investment
• Outsourcing and its effects on earnings of the poorly educated
• Baldwin argues:
o 1. From 1820-1990 technological innovation, particularly invention of the
steam engine and improvements to it caused transportations costs to fall and
trade to increase
▪ Within this – principle of comparative advantage operated: i.e. rich
countries imported raw materials from poor countries, turned them
into products and sold to both rich and poor countries
▪ Caused rising earnings in rich countries and living standards rose
more rapidly in rich countries than in poor ones
o 2. Around 1990 – ICT revolution gathered speed, made coordination of
production and distribution at a world scale possible
▪ From this – value chains were created involving both rich and poor
countries, but increasingly poor ones
o 3. This shift of production to poor countries a) put pressure on rich country
wages, and b) growth accelerated in a subset of poorer countries (i.e. China,
Korea, Thailand, Poland, India)
▪ Baldwin calls this the second unbundling and it rests on use of ICT to
monitor production and distribution process at great distances
• Modern outsourcing depends to some extent on ICT
5. Immigration
• George Borjas emphasizes immigration as a factor
• US – a disproportionate share of immigration (both legal and illegal), is made up of
Hispanics with low education levels
o They compete with the poorly educated citizens of the US
o This competition forces down earnings in lower part of distribution this
would increase inequality
• Canadian immigration – points system favors the highly educated
o This points system has put pressure on earnings in the upper part of the
Canadian distribution – which reduces inequality
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