February 16, 2011
Wages are a key component of the overall economic well-being of individuals and families. Hourly wages and hours worked determine an individual's earnings, and for most nonelderly adults, earnings constitute the bulk of their family's income. This CBO study documents changes in the level and distribution of hourly wages in the United States between 1979 and 2009. It also reviews the research literature on important factors that most likely underlie the observed trends in wages.
The wage rate (the wage per hour of work) received by workers in the middle of the wage distribution (the 50th percentile) increased by about 20 percent over the 1979–2009 period after adjusting for inflation, reaching about $17 per hour in 2009. The dispersion of wages—the gap between wages at the top and bottom of the distribution—also increased over that period, but the pattern of changes at the top and bottom differed. For men and women alike, the gap between the wage rates received by high-wage (90th percentile) and middle-wage workers expanded throughout the 30-year period; the wage rates of high-wage women grew especially rapidly. In contrast, the gap between the wage rates received by low-wage (10th percentile) and middle-wage workers widened for both men and women early in the 1980s but has remained stable for the past 20 years.
Wages are affected by market forces (the level and distribution of skills supplied by workers and employers' demand for those skills) and institutional factors (such as minimum-wage laws and changes in the share of the workforce represented by unions). Given the complex pattern of changes in the wage distribution during the past 30 years, it is not surprising that no single explanation can account for the entire pattern.
In the category of market forces, innovations in information and computing technology in the 1990s and 2000s generated growing demand for skilled labor, particularly for highly educated workers, that outpaced growth in the supply of highly skilled, highly educated workers; that differential probably played a large role in the observed changes in the wage distribution. Shifts in international trade might also have contributed to increasing relative demand for skilled labor, as imports from low-wage countries substituted for some domestic production and employment; however, research on the significance of that effect is inconclusive. In addition, a rising number of foreign-born people in the workforce affected the relative supply of workers with different amounts of education, but that shift appears to have had only a modest effect on the distribution of wages.
Turning to institutional factors, the decreasing real (inflation-adjusted) value of the federal minimum wage probably increased wage dispersion in the bottom half of the wage distribution in the 1980s. Moreover, declining unionization rates contributed to increasing dispersion in the upper half of the wage distribution for men over that same decade. Neither of those factors is a plausible explanation for the changes in the wage distribution in the 1990s and 2000s, however.
Although this study focuses on hourly wages, changes in the level and distribution of hourly compensation, which includes both wages and fringe benefits, are also important. Unfortunately, data on hourly compensation are more limited than data on hourly wages. Based on the data that are available, the dispersion in hourly compensation in the upper half of the distribution was similar to the dispersion of wages, on average, between 1987 and 2007. In the lower half of the distribution, the dispersion of hourly compensation was somewhat greater than that for wages, on average, during the same period. Nevertheless, for both the upper and the lower halves of the distribution of compensation, the changes in dispersion over those two decades were similar to the changes in the dispersion of wages.
A related CBO study published in October 2009 analyzed trends in the distribution of annual earnings (Changes in the Distribution of Workers' Annual Earnings Between 1979 and 2007); a forthcoming CBO study will examine trends in the distribution of household income between 1979 and 2007.