Two Sides of the Same Coin: U.S. "Residual" Inequality and the Gender Gap

This is the authors' abstract. We don't add key points for this paper.

In this paper we show that the two major developments experienced by the US labor market -rising inequality and narrowing of the male-female wage gap -can be explained by a common source: the increase in price of cognitive skills and the decrease in price of motor skills. We obtain the price of a multidimensional vector of skills by combining a hedonic price framework with data on the skill requirements of jobs from the Dictionary of Occupational Titles (DOT) and workers' wages from the CPS. We find that in the 1968-1990 period the returns to cognitive skills increased 4-fold and the returns to motor skills declined by 30%. Given that the top of the wage distribution of college and high school graduates is relatively well endowed with cognitive skills, these changes in skill prices explain up to 40% of the rise in inequality among college graduates and about 20% among high school graduates. In a similar way, because women were in occupations intensive in cognitive skills while men were in motor-intensive occupations, these skill price changes explain over 80% of the observed narrowing of the male-female wage gap.