Explaining the Growing Inequality in Wages across Skill Levels

uring the 1980s, the gap between the earnings of low-skilled and high-skilled workers grew substantially in the United States. Researchers have advanced a number of arguments to explain the increasing disparity. This article uses descriptive and statistical evidence to evaluate two of the most prominent arguments: increased competition from low-wage developing countries—the “trade” argument—and technological advances favoring high-skilled workers. We also consider other proposed explanations of growing wage inequality, although in less detail. We conclude that technological change, combined with overall growth in the capital stock, is the most important factor driving the growing wage inequality between low-skilled and high-skilled workers. Increased competition from abroad, both from developing and industrialized countries, appears to explain a significant but much more modest portion of the growing gap. A third substantial source of growth in the wage differential is the shift in demand for the products of different industries.1