Revisiting U.S. Wage Inequality at the Bottom 50%

Oren Danieli, Assistant Professor, Department of Economics, Tel Aviv University

Abstract: I propose a model of a skill-replacing routine-biased-technological-change (SR-RBTC). In this model, technology substitutes the usage of skill in routine tasks, in contrast to standard RBTC models which assume technology replaces the workers themselves. The SR-RBTC model explains three key trends that are inconsistent with standard RBTC models: why specifically middle-wages declined even though routine workers are dispersed across the entire bottom half of the wage distribution, why middle-wages stopped declining while the technological change continued, and why there is no substantial decline in the average wage of routine workers. I derive two new testable predictions from the model: a decrease in return to skill, and a decrease in skill level in routine occupations. I use an interactive-fixed-effect model to confirm both predictions. Since SR-RBTC violates the ignorability assumption required by standard decomposition methods, I introduce “skewness decomposition” to show that SR-RBTC is the main driver of bottom-half inequality trends.

Oren Danieli is an assistant professor at Tel Aviv University School of Economics and a visiting research scholar at the Industrial Relations Section at Princeton University. He received his PhD in Business Economics from Harvard University. He works in Labor Economics, Econometrics, and Political Economy. His interests include income inequality, education, and populism.