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December 11, 2024

The polarization of industry wages

A small set of industries accounts for the rise in US earnings inequality over the last two decades.

Tyler Smith

Source: mast3r

Since the 1970s, an increasingly large percentage of income in the United States has gone to a select few at the top of the earnings distribution. But data limitations have hampered economists’ efforts to pinpoint the drivers of this growing inequality.

In a paper in the American Economic Review, authors John Haltiwanger, Henry R. Hyatt, and James R. Spletzer show that the overall increase in wage inequality is driven by a small number of industries. High-wage workers are increasingly sorted into high-wage industries, such as high-tech, while low-wage workers are increasingly sorted into low-wage industries, such as fast food and retail.

The researchers drew their conclusions from analyzing the Longitudinal Employer-Household Dynamics (LEHD) linked employer–employee data, which includes detailed wage records and employer information from 1996 to 2018 and covers roughly 44 percent of national employment.

Figure 1 from the authors’ paper displays two key metrics for industries in their study.

Figure 1 from Haltiwanger et al. (2024)

The chart shows the percentage of total employment in each industry in 1996 (blue bars), and how much each industry contributed to the growth in wage gaps over the period of study (orange bars).

A small number of industries on the right side of the graph show very large contributions to inequality, while most industries in the middle had minimal impact. In particular, the top-30 industries account for about 98 percent of the increase in between-industry inequality, despite employing less than 40 percent of workers.

The findings suggest that broad-based policies alone, such as general education initiatives or universal minimum wages, might be insufficient to address inequality. Instead, policymakers should consider more targeted approaches that account for the uneven impact across industries of mechanisms such as changing technology, market structure, and globalization.