The Role of Wage Persistence in the Evolution of the College-High School Wage Gap

This paper examines the role of persistent effects of past labor market conditions in explaining trends in the college-high school wage gap in the US. I document increases in the wage gap for older workers since the late 1990s, which are larger than those predicted by standard explanations and are consistent with an important role for persistence in the wage gap. Using a semi-parametric estimation procedure, I show that the increases are caused by changes in age profiles in the wage gap across birth cohorts, rejecting the assumption of constant age profiles in prior work and providing evidence of persistence in the wage gap. I find that higher unemployment at the age of high school graduation leads to higher college-high school wage gaps through age 30 in the birth cohort. I identify the persistent effects of initial unemployment rates controlling flexibly for unobserved transient effects of contemporaneous conditions. The fade out of persistent effects of initial unemployment rates with age can account for over a third of the unexplained increase in the wage gap for older workers. The results imply that an important component of wage inequality is driven by the luck of birth cohorts to enter the labor market when conditions are favorable. To alleviate the effects of persistent wage inequality, policy makers should consider targeted cross-generational transfers over transfers designed to alleviate only the effects of transitory labor market conditions. ∗Department of Economics and Gerald R. Ford School of Public Policy, University of Michigan; E-mail: [email protected]