The Internationalization of the U.S. Labor Market and the Wage Structure

eginning with the important work of Murphy and Welch (1992), a great deal of recent research has attempted to document and explain the dramatic changes in the wage distribution that occurred during the 1980s (see also Katz and Murphy 1992). Practically every income group faced a decline in real wages during the 1980s. However, workers at the 33rd percentile experienced a 14 percent drop in the real wage, workers at the 66th percentile experienced only a 6 percent drop, and workers in the upper tail of the distribution experienced a 1 percent wage increase. Therefore, the widening of the wage distribution occurred because the relative wage of less skilled workers fell dramatically during the decade. Although these facts are indisputable, there is considerable disagreement about the causes of the increase in wage inequality. The trends can be understood in terms of a simple supply-demand equilibrium story. It is well known that the labor market entry of the large baby boom cohort in the 1970s shifted out the supply curve of college graduates, thus depressing the payoff to a college education throughout much of that decade. During the 1980s, however, the rate of increase in the supply of college graduates slowed dramatically. The relative decline in the number of new labor market entrants with a college education raised the wage gap between college graduates and less educated workers. It turns out, however, that if the elasticity of labor demand has a reasonable value, the supply shifts cannot generate the huge increase in the returns to schooling that occurred during the 1980s. As a result, it must also be the case that the demand for skilled workers shifted out by more than the demand for unskilled workers. A number of hypotheses can explain the differential shifts in labor demand. For instance, the de-unionization of the labor market probably had a particularly adverse impact on the wage of unskilled workers. Because unions B