What explains the US wage gap?

A new and noteworthy paper by Claudia Canals from Columbia University seeks to decompose the widening US wage gap: What Explains the Widening Wage Gap? Outsourcing vs. Technology (PDF).

The approach taken is an accounting decomposition: using a two-step methodology based on Haskel and Slaughter (2002) to decompose the change in factor prices or wages into their different sources:

In particular, we derive a way of measuring technological change (first step) and a theory that links wages to technological change (second step). We then link the changes in technology from the first step with the change in wages from the second step.

The results are interesting:

..we quantify that outsourcing accounts for 28 percent of the actual widening in the wage gap in the 1980-1999 period, biased technological change explain 15 percent of the widening, and total biased technological change explain up to 58 percent of it.

The methodology is innovative, overcoming some of the problems with previous approaches. Her paper also goes beyond most in this field by including not only manufacturing but major service industries as well.

Unfortunately the data is quite dated, only going up to 1999. Canals used the BEA's Historic Input-Output Accounts, which are based on the 1987 Standard Industry Classification, and are not consistent with the newer NAICS-based estimates for 1997-2004. Let's hope she does another paper using the newer data, to see whether outsourcing effect has grown since the 1990s.

I am also looking forward to reading her forthcoming paper, Why previous methods of tackling the effect of outsourcing into labor demand have failed?

Comments

[Charles Pernick]

Claudia Canals is dead wrong. The plain and simple fact of the wage gap is due to the global supply of labor and its demand. There are no hidden variables which implies it doesn't matter if one is a skilled or unskilled labor. See my blog: Neoclassical Theory of Production [http://neoclassicaltheory.blogspot.com/] for the detailed math of how one can unify all economic schools of thought under a global topological theory and Federal Reserve and Monetary Policy's section Chavez's Curve Ball [http://fedwatch.blogspot.com/2005/11/federal-reserve-and-monetary-policy_30.html] for an explanation as to why the US of A is in class-warfare. The Illegal Aliens Rights movement is really an economic struggle.

[Arthur Eckart]

Charles, it would seem outsourcing is a valid argument for the widening of the wage gap, because less skilled domestic labor has to compete with lower wage foreign labor (which may have also facilitated the decline of domestic unions). Skilled biased technological change also seems to widen the wage gap, because skilled labor and technology are compliments, i.e. more than unskilled labor.

[Charles Pernick]

The problem is not really outsourcing. The problem is Global GDP. It is not high enough to absorb the supply of the global labor force.

My term for outsourcing is based on where labor is located and where the customers/clients are located. I call it off-shoring if there is a national boarder that currency, goods and services have to cross.

Off-shoring, in general, is not bad for the global economy. It allows a process that I call, “Chasing the Sun” to occur. “Chasing the Sun” is an efficient means of completing a task. This implies that “Chasing the Sun” is relevant to information and informational processes.

India is not an economic crises. Work force turnover is high in the IT field. India's consumer society is growing. The cost of goods, services and its distribution would, in time, be equalized.

China is an economic crises. The Chinese government has not lived up to its WTC rules. The US of A and other developed countries need the ability to provide services to the Chinese consumers/clients (“Chasing the Sun”).