A famous puzzle in economics is that US wage inequality increases sharply between groups with different levels of education and labour market experience, while at the same time the wage gap between men and women decreasessignificantly. Existing studies explain some of these inequality trends in isolation but they fail to provide a unified justification of all three – education, experience and gender wage premia – at the same time.
Analysis by Theodore Koutmeridis, to be presented at the Royal Economic Society''s 2014 annual conference, provides a new explanation for the combination of these puzzles. The author suggests that gender gaps make borrowing costlier for women, due to credit rationing. In particular, lenders realise that women are less likely to repay their loans, as they get lower wages compared with men with similar observable characteristics.
But when the gender gap narrows, due to falling discrimination, credit constraints relax not only for women but moderately for men too, as a result of positive externalities – banks cannot distinguish perfectly the loan repayments of women to those of men. This allows talented men and primarily gifted women to acquire skills and leave the uneducated pool.
In turn, it decreases unskilled-inexperienced wages, boosts the education and the experience premium, while it lowers further the gender wage gap, generating a positive feedback loop of more equal opportunities, lower inequality between genders and higher inequality within gender.
A distinguishing feature of this study compared with related research is that it approaches inequality in a unified way. Some patterns of increasing wage inequality, such as the rise in the education premium or the decline in the gender wage gap, are well documented. But some other aspects of widening inequality, such as the growing experience wage premium, are less well reported, if not entirely absent from most existing studies. Additionally, existing studies cannot explain the puzzling coexistence of decreasing inequality between genders and increasing inequality within gender, as both the education and the experience premium grow.
This study provides a unified explanation that fits the following key facts:
· The education premium increases more for inexperienced men and women, while it increases only moderately for experienced workers.
· The experience premium increases only for low-educated men and women, while it remains almost constant for highly educated labour.
· The gender wage gap declines for all highly educated, low-educated, experienced and inexperienced workers.
· The supply of skills grows for both males and females but the rise is larger for the latter.
This research shows that there are several factors that decrease the gender wage gap, such as falling gender discrimination and the better allocation of ability in education. Additionally, apart from accounting for the puzzling coexistence of growing inequality within gender and the falling inequality between genders, this study explains the evolution of wage inequality for each education-experience-gender group.
One important prediction of this study is that wages for unskilled and inexperienced workers decline sharply and this generates the increase in wage inequality. This theory is consistent with US data between 1970 and 2000.
An interesting policy implication is that equalising borrowing opportunities for men and women, decreases inequality between genders, while it also increases inequality within gender by boosting the wage gap between different education and experience groups for both sexes. This conclusion alerts policy-makers to the complex nature of inequality and the inability to achieve multiple targets through a single policy.
''Sorting Inequality with Gender-specific Credit Constraints'' by Theodore Koutmeridis. Theodore Koutmeridis is at the University of St Andrews
Senior Lecturer in Economics at University of Glasgow