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Why The Wage Gap Widened


Economic Trends

Why the Wage Gap Widened

And why it has been narrowing

What's behind the growing gap between the earnings of those at the top of the income ladder and those near the bottom? Because rising wage inequality in recent decades has occurred in many countries besides the U.S. and in a variety of industries, economists have favored explanations that cut across national and industrial borders.

The most likely culprit, claim the experts, is changing technology, which has presumably boosted the demand for better-educated workers, while depressing the job opportunities and wages of the less skile just a week's notice before elections, and until recently all signs were pointing to a November date. But unexpectedly heavy monsoons in the north have rendered impassable the roads that trucks would have used to carry ballot boxes. On top of that, increasingly intense political mudslinging has contributed to the delay. In the latest round, former Deputy Premier Anwar Ibrahim, now on trial on sodomy charges he says are concocted, alleged in court that Mahathir's current right-hand man, Finance Minister Da12% over those two decades, they found that it actually fell in seven states and rose by 18% to 25% in eight others.

To explain such differences, Bernard and Jensen looked at such developments as changing technology, international trade, immigration, and falling minimum wage levels. Although their analysis implicated several, they found that changes in industrial composition played the most significant role--accounting for 30% to 55% of state changes in inequality.

Specifically, states that lost manufacturing jobs, such as those in the Northeast and Midwest, had the biggest rises in inequality, while those that gained manufacturing jobs, such as states in the South, tended to post either decreases in inequality or very modest increases. (Wyoming and Oregon also had widening wage gaps, apparently due to shocks sustained by the oil and lumber industries.)

Although it focuses on past decades, the study may shed light on recent reports that the trend toward rising wage inequality has slowed appreciably. After posting big losses in the 1980s, notes Bernard, "manufacturing jobs appear to have more or less stabilized in the 1990s."By Gene KoretzReturn to top

TABLE

Rising Wage Inequality: Some States Bucked the Trend

Percent change in wage inequality*, 1970-1990

WHERE IT ROSE

OREGON +25%

WYOMING +23

MICHIGAN +22

NEW YORK +21

PENNSYLVANIA +20

INDIANA +19

WHERE IT FELL

VIRGINIA -7%

N. DAKOTA -6

N. CAROLINA -4

GEORGIA -4

MISSISSIPPI -3

S. CAROLINA -1

*Wage inequality measured by ratio of wages at 90th percentile of workers

to wages at 10th percentile

DATA: ANDREW B. BERNARD AND J. BRADFORD JENSEN

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Are Americans Spendthrifts?

Not by this reckoning

Mainly because of a change in methodology, the personal savings rate has been revised upward to 2.1% last quarter, from -1.5%. The rate still remains on a sharp downward trend, however, hitting 1.6% in September, a level that many find dangerously low.

Not to worry, advises Merrill Lynch economist Bruce Steinberg, who says the official savings number is badly biased downward. In calculating the rate, he notes, the government inconsistently subtracts capital-gains taxes from income while failing to count as income the gains on which those taxes are paid.

If realized capital gains were counted as income (which is how most people see them), Steinberg figures the current savings rate would be 10%--close to its historic level. In other words, people have not been dipping into their unrealized capital gains, as some charge.

If the market corrects, says Steinberg, capital-gains realizations would slow--and so would consumer spending. But since Americans haven't really been spendthrifts, there would be no disaster.By Gene KoretzReturn to top


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