We examine the extent to which declining manufacturing employment may have
contributed to increasing inequality in advanced economies. This contribution is typically
small, except in the United States. We explore two possible explanations: the high initial
manufacturing wage premium and the high level of income inequality. The manufacturing
wage premium declined between the 1980s and the 2000s in the United States, but it does
not explain the contemporaneous rise in inequality. Instead, high income inequality played
a large role. This is because manufacturing job loss typically implies a move to the service
sector, for which the worker is not skilled at first and accepts a low-skill wage. On
average, the associated wage cut increases with the overall level of income inequality in
the country, conditional on moving down in the wage distribution. Based on a stylized
scenario, we calculate that the movement of workers to low-skill service sector jobs can
account for about a quarter of the increase in inequality between the 1980s and the 2000s
in the United States. Had the U.S. income distribution been more equal, only about one
tenth of the actual increase in inequality could have been attributed to the loss of
manufacturing jobs, according to our simulations.
Mr. Rodolfo Luzio, Mr. Steven V Dunaway, and Mr. Martin D Kaufman
This paper presents a simple framework that illustrates the link between skill-based wage differentiation and human capital acquisition given skill-biased technical progress. The analysis points to the economic costs resulting from labor market and income redistribution policies that prevent the skill premium from playing its role in fostering human capital accumulation and the adoption of new technologies. The study compares key economic indicators among Canada, France, Germany, the United Kingdom, and the United States. Differences in wage differen-tiation and investment in new technologies among these countries could be related to policies affecting labor markets; such practices may reflect social choices.
This Selected Issues paper analyzes the condition of household, corporate, and bank balance sheets; sustainability of the U.S. external current account deficit; the impact of a slowdown in the growth on the euro area economy; and the implications of the reduction in U.S. treasury securities for monetary policy and financial markets. The study discusses the pros and cons of investing government assets in private securities; the recent changes in agricultural support policy and their impact on other countries; technological innovations and the adoption of new technologies.