Earnings Inequality across Labor Markets: A Test of the Human Capital Model

This paper provides a test of the Chiswick-Mincer specification of the human capital model in an analysis of earnings inequality across U.S. labor markets.1 The determination of income inequality across states and metropolitan areas has been examined in numerous studies.2 In these studies, Gini coefficients are used as a measure of inequality and are regressed on a host of economic and demographic variables. Typically, it is found that income inequality is inversely related both to the level of schooling and to the level of income. The former finding is often used to lend support to arguments for increased educational expenditures, while the latter finding is often cited to support the U hypothesis of Kuznets [12] that income becomes more equally distributed during later stages of economic development after having become less equal during early stages. These findings have been replicated using data across cities and states, and have been found to hold at various points in time. However, the theoretical basis for the relationship of inequality with the level of schooling and of income has not been clearly developed.