Modeling Wage Inequality in the U.S. as Conditional Variation: A Time Series Approach

Abstract

In this paper, we argue that wage volatility is a good proxy for wage inequality because of the strong and lagged correlation between the two. For six industry categories, inequality is modeled as a conditional variance process over the period 1964-1988. It is modified to allow for explanatory variables that have a robust theoretical basis for inclusion as determinants of wage inequality. One of the major findings is the identification of the major contributors to rising U.S. wage inequality in the 1980s: the declining real value of the minimum wage, the loss of collective bargaining gains by labor, and immigration.