RISING FAMILY INCOME INEQUALITY IN THE UNITED STATES, : IMPACTS OF CHANGING LABOR SUPPLY, WAGES, AND FAMILY STRUCTURE.

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1 RISING FAMILY INCOME INEQUALITY IN THE UNITED STATES, : IMPACTS OF CHANGING LABOR SUPPLY, WAGES, AND FAMILY STRUCTURE Culee Lee Working Paper 11836

2 NBER WORKING PAPER SERIES RISING FAMILY INCOME INEQUALITY IN THE UNITED STATES, : IMPACTS OF CHANGING LABOR SUPPLY, WAGES, AND FAMILY STRUCTURE Culee Lee Working Paper ttp:// NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Maacuett Avenue Cambridge, MA December 2005 I tank Yongung Cang and Robert W. Fogel for teir elpful comment and uggetion on earlier draft, and Jiyun Kim for er reearc aitance. I gratefully acknowledge te financial upport provided by National Intitute on Aging, te National Intitute of Healt (P01 AG10120), and Korea Reearc Foundation Grant (KRF B00104). Te view expreed erein are toe of te autor() and do not necearily reflect te view of te National Bureau of Economic Reearc by Culee Lee. All rigt reerved. Sort ection of text, not to exceed two paragrap, may be quoted witout explicit permiion provided tat full credit, including notice, i given to te ource.

3 Riing Family Income Inequality in te United State, : Impact of Canging Labor Supply, Wage, and Family Structure Culee Lee NBER Working Paper No December 2005 JEL No. J2, E2, N3 ABSTRACT Ti tudy etimate wat fraction of te rie in family income inequality in te United State between 1968 and 2000 i accounted for by cange in eac of te family income component uc a wage, employment, and our worked of family ead and poue, family tructure, and oter income. Te increaed diparitie in oter income and labor upply account for, repectively, 29 percent and 28 percent of te rie in te difference in income between te top 10t and bottom 10t familie. Structural cange in wage, largely regarded a te major culprit of te increae in income inequality, explain le tan a quarter of te rie in te meaure of family income inequality. Canging fraction of familie wit bot uband and wife and cange in te compoition of te income ource account for 11 percent and 16 percent, repectively, of te widening of te income gap. Te relative importance of te effect of canging labor upply declined over time, wile tat of wage cange increaed. For te upper alf of te income ditribution, wage cange were te dominant caue of te increae in te gap between te ricet 10t and middle-income familie. For te lower alf of te income ditribution, in arp contrat, cange in labor upply and oter income were te principal caue of te growing ditance between te poor and middle-income familie. Culee Lee Scool of Economic Seoul National Univerity Seoul, Korea and NBER cullee@nu.ac.kr

4 1. Introduction Riing income inequality i one of te mot marked feature of te U.S. economy in te era of globalization and IT revolution. 2 Over te lat couple of decade, an extenive literature a been accumulated regarding te pattern and caue of te growing diparitie in income. Te primary focu of recent tudie a been on canging diperion in individual wage between and witin variou demograpic group poeing different uman capital attribute. Some major explanation for te widening of wage gap between ig- and low-killed worker are: tecnological cange, international trade, tranfer abroad of production activitie, inflow of lekilled immigrant, degraded quality of education, decline of labor union, and deregulation of indutrie. 3 Altoug it i now muc better undertood ow te wage tructure tranformed over time and wat produced te cange, tank to te large body of evidence uggeted previou tudie, it i le clear ow te increaed income inequality affected te ditribution of te wellbeing of individual. In particular, it i triking tat only a few tudie ave rigorouly documented te canging ditribution of family income. Given tat family member jointly make deciion on labor upply, pool teir earning, and are family reource, family income i perap a better meaure of material wellbeing of a peron tan i or er own wage. A in te cae of individual wage and earning, te family income diparity in te United State a arply widened over te lat everal decade. 4 One cannot imply aume tat riing wage inequality i te main tory beind te increae in family income inequality becaue family income i 2 See Levy and Murnane (1992) and Gottcalk (1997) for te pattern of riing inequalitie in variou labor-market outcome. 3 See Hunt (1992) and Borja, Freeman, and Katz (1997) for te impact of te inflow of immigrant; Wood (1994), Borja, Freeman, and Katz (1992, 1997), and Sac and Satz (1994) for te effect of international trade; Freentra and Hanon (1999) and Miller (2001) for te role of international outourcing of production; Berman, Bound, and Grilice (1994), Krueger (1993), Autor, Katz, and Krueger (1998), and Dom, Dunne, and Troke (1997), Brenan, Brynjolfon, and Hitt (2002) for te impact of tecnological cange; and Freeman and Katz (1995), Gottcalk and Smeeding (1997), OECD (1996), and Fortin and Lemieux (1997) for te influence of intitutional cange. 4 Between 1970 and 2000, for intance, te are of te aggregate income received by te lowet fift familie fell from 5.4 percent to 4.3 percent. In contrat, te are of income earned by te top 5 percent familie increaed from 15.6 percent to 21.1 percent during te ame decade (U.S. Bureau of te Cenu 1996, No. 719; U.S. Bureau of te Cenu 2004, No. 672). 2

5 Te previou tudie on income inequality ave largely focued on male determined by many oter factor in addition to individual wage. Tee factor include employment and our worked of eac of family member, family tructure, and nonlabor income. Only a mall number of tudie ave paid attention to te effect of canging labor upply on income inequality. Burtle (1990, 1993) and Moffitt (1990) reported tat te growt in annual earning inequality for male worker during te 1970 and 1980 wa primarily due to growing inequality in ourly wage rate. On te oter and, Haveman (1996) uggeted tat te increae in earning inequality between 1973 and 1988 among working-age men wa largely produced by increaed variability in te amount tat potential breadwinner worked. 5 Hylop (2001) reported tat, among married working couple, beavioral labor upply repone to wage cange explain 20 percent of te rie in family earning inequality in te early Lee (2001) computed tat cange in labor market activity of family ead accounted for alf of te increaed gap between familie in te top and bottom income decile between 1969 and worker. However, pattern of individual labor force participation and of our of work need to be undertood in te context of joint deciion made by family member. For example, if income effect i trong, fewer working our or lower wage of a family ead could be upplemented by increaed our worked by te poue or oter family member. Te exiting literature i nearly ilent about ow cange in employment and our of family ead and poue jointly contributed to te family income inequality. Burtle (1993) etimated te contribution of te employment and our cange by comparing te actual and counterfactual cange in Gini-ratio for te period However, i tudy, after all, dealt wit individual earning of men and women rater 5 Tee tudie ue variance of logaritm (VLN) of earning a te meaure of inequality. Tey decompoe te VLN of earning into (1) VLN of wage rate, (2) VLN of our worked, and (3) a covariance term between te two. Tey ten oberved cange in eac factor over time to ae it relative contribution to te increae in te VLN of earning. 6 Te main evidence of ti tudy come from te own- and cro-covariance tructure of wage and earning of couple in te Panel Study of Income Dynamic (PSID). 7 Ti tudy etimate a counterfactual meaure of te family income inequality for 1989 tat would ave reulted, ad te employment and our ditribution a of 1969 remained uncanged. 3

6 tan family earning. 8 Hylop (2001) found tat married men and women tended to increae (decreae) te our in repone to diminied (increaed) earning of teir poue. Baed excluively on a ample of employed couple, owever, ti tudy fail to provide evidence regarding te effect of canging pattern of employment on family income inequality. Tere are a few tudie tat enable u to predict ow canging pattern of work affected te family income inequality. Decline in employment wa particularly evere among le-educated and low-wage men between 1967 and 1988 (Jun 1992). Te rie in two-earner couple a been more pronounced in familie in wic te uband earning are iger (Cancian, Danziger, and Gottcalk 1993). Employment and earning gain ave been greatet for wive of middle- and ig-wage men (Jun and Murpy 1997). Te inter-poual correlation of wage, our, and employment increaed between 1979 and 1987 (Blackburn and Bloom 1995). Finally, a noted above, te intertemporal ubtitution effect of a wage cange dominated it income effect for married women in te early 1980 (Hylop 2001). Tee cange in employment and earning pattern of men and women ould ave increaed te family income inequality to ome extent. However, te magnitude of te joint effect i unclear. Te purpoe of ti paper i to examine wat fraction of te rie in family income inequality in te United State between 1968 and 2000 i accounted for by cange in eac of te following component of te family income: (1) employment of te ead, (2) te our worked of te ead, (3) te wage rate of te ead, (4) marital tatu of te ead, (5) employment of te poue, (6) te our worked of te poue, (7) te wage rate of te poue, (8) te income from oter ource tan te earning of te ead and te poue, and (9) te fraction of te family income coming from a particular ource. More pecifically, I etimate wat percentage of te cange in te meaure of family income inequality (defined in ti tudy a te difference in te log of te average income between familie in different income decile) i attributable to te cange in te above factor for te period between 1969 and 1999 and te tree ubperiod, , , and He ranked individual into earning quintile according to family earning rater tan individual earning, and calculate counterfactual mean earning for eac earning quintile, auming no cange in te mean employment rate and our of work in eac earning group. 4

7 Ti tudy i ditinct from oter tudie in te following repect. Firt, ti tudy explicitly conider at te ame time all potentially important factor of te total family income inequality. To my knowledge, ti tudy i te firt tat combine te effect of canging wage, employment, our worked, family tructure, and compoition of income into a ingle decompoition framework. Second, my tudy compare reult baed on everal different ample of population, namely, (1) all familie eaded by peron aged 18 to 64, (2) all oueold including familie and ingle oueolder, (3) familie eaded by peron aged 25 to 55, and (4) familie eaded by male aged 25 to 55. Uing alternative ample not only enable me to avoid ample-election biae but alo elp interpret te reult more accurately. Finally, my tudy cover te entire tree decade during wic te family income inequality increaed, and compare te reult for eac decade witin te period under tudy. Ti will elp undertand ow te mecanim of riing income inequality canged over time. Te organization of ti paper i a follow: I begin wit developing a metod of decompoing a cange in family income in te next ection. Section 3 introduce te data ued in te analyi. Section 4 decribe te pattern of cange in te element of family income inequality between 1969 and In ection 5, I preent te reult of te decompoition tat provide explanation for ow eac of te component of family income contributed to te cange in income inequality. I alo examine ow te reult cange were alternative meaure of inequality are ued. Section 6 compare te reult baed on everal different ample. Te final ection ummarize te paper. 2. Analytical Framework I begin wit a decompoition of total family income into everal component. Te definition of variable repreenting eac of te component i given in Table 1. Te average annual money income of oueold in a given income decile, denoted N, may be preented a (1) N H W P + H W P δ Q + 5

8 were H, H, W, and W tand for te mean annual our worked and te mean ourly wage rate for employed ead and poue, repectively; P and P tand for te employment rate for ead and, if married, poue; δ i te fraction of oueold in wic bot uband and wife are preent; and finally, Q tand for te mean income from oter ource. A te meaure of income inequality, I ue te difference in te log of average family income between two income decile, ay, te top and te bottom income decile (denoted by N ). Tat i, TOP ln[ ] ln[ BOTTOM N = N N ]. Uing an approximation, N can be decompoed a own in equation (1), were te aterik denote te difference in te log of a variable in te top and bottom decile of familie. For example, H TOP = ln( H ) ln( H ). Equation (1) can be rewritten a BOTTOM (2) N Φ ( H + W + P ) + Φ ( H + W + P + δ ) + Φ ( Q ) Q were Φ denote te weigt of eac of te tree income ource. For example, Φ [ ( H W P ) / N] indicate te earning of ead a a proportion of te total average = family income. It i poible to decompoe te cange in N over time, in ti cae, ay, between 1969 and 1999, by differentiating equation (2) totally, to obtain (3) N Q Φ H Φ Φ H Q + Φ + Φ W Q + Φ W Q + Φ P + Φ P + Φ ( H + Φ δ + Φ ( H + W + W + P ) + + P + δ ) + Te firt term on te rigt-and ide of equation (3), for example, repreent te rate of cange in te diparity in average our worked by family ead in te top and bottom decile, weigted by te relative are of family income derived from te earning of te ead. Te etimate of ti term indicate te relative contribution of te cange in average working our of ead to te rie in te meaure of income inequality between 1969 and Likewie, te econd and tird term ow te relative contribution of 6

9 cange in ourly wage and in te employment rate of ead, repectively. On te oter and, te fourt term repreent te effect of canging weigt, tat i, te relative importance of earning of family ead a a ource of income. If earning of family ead are more unequally ditributed tan oter ource of income, an increae in te are of earning of te ead in te total family income would produce a rie in te magnitude of inequality. It ould be noted tat I do not follow up te individual familie over time uing ti metod. I am only comparing te familie in particular income group today wit te familie in tat income category in te pat, wo are not necearily te ame. Te quetion to be anwered uing te metod explained above i wy te difference in income between ric and poor familie today i muc greater tan it wa tirty year ago. More pecifically, ti tudy examine ow te gap between today ric and poor familie in wage, employment, our, oter income, and family tructure differ from te diparitie in tee factor between te ric and te poor in te pat. Te framework ued in ti tudy, owever, can provide only limited int a to wy te ditribution of tee family income component canged over time. For intance, te rie in te diparitie in employment and our of ead and poue may ave reulted from individual familie beavioral repone to cange in economic condition uc a canging wage tructure, wic cannot be analyzed in te preent framework. However, I believe it i important to undertand firt wat appened even if it cannot be fully explained wy it appened. 3. Data Te balance of ti paper i baed on data from Annual Demograpic File on te Marc Current Population Survey (CPS, ereafter) for te urvey year 1969 to Since mot of te calculation below are baed on annual earning, week worked, and uual our of work per week in te year previou to te urvey, ti tudy cover te calendar year 1968 to Te ecular rie in te family income inequality tarted in te late 1960 and continued tereafter. Accordingly, I cooe four benc-mark year, 1969, 1979, 1989, and 1999 to tudy long-term cange. Te pattern of cange in te determining factor of family income inequality may be enitive to te coice of te initial and end year (ee, for example, Haveman 1996). I average tree year of data 7

10 centered around te benc-mark year to mitigate poible buine cycle effect. Tu te average I report for 1969, 1979, 1989, and 1999 are actually baed on te , , , and CPS data. Te main unit of analyi ued in ti tudy i te family wic i compoed of two or more related peron. I limit te ample to familie woe ead are at working age (between 18 and 64). 9 However, alternative ample election may provide different reult. 10 Te tree decade under tudy ave witneed a great tranformation in te living arrangement. A te fraction of non-family oueold greatly increaed, te population covered by te ample compoed of familie ould ave diminied. Moreover, te working age coen ere (18 to 64) may not be fully comparable acro different coort becaue of te ecular rie in college attendance and early retirement over te tree decade. Te increae in te proportion of female-eaded familie wa alo remarkable. In addition to te primary ample compoed of familie, for tee reaon, I ue everal alternative ample covering different population for teting te enitivity of te reult to te election of te ample (ee ection 6). Uing tee data et, I calculate te component of te mean family income for eac income decile, a explained above. Te income and earning are all converted into dollar. Te employment rate for family ead (poue) i calculated dividing te number of toe wo worked at leat one week lat year by te number of all familie for eac income decile. I calculate annual our of work by multiplying week and uual our worked per week lat year. 11 I ten etimate te annual our 9 I exclude a mall number of familie in wic wife i recorded a te ead becaue uband reide elewere wile remaining married. Te number of familie covered by te ample for eac year i 32,964 (1968), 31,499 (1969), 32,016 (1970), 33,842 (1978), 39,839 (1979), 39,842 (1980), 29,790 (1988), 32,316 (1989), 32,101 (1990), 31,188 (1998), 31,431 (1999), and 30,194 (2000). 10 Karoly (1993) provide a good example of comparing te pattern of canging inequality baed on different population. Haveman (1996) noted tat te increae in te variance of our worked accounted for muc larger proportion of te rie in te variance of log of male earning for all male tan it did for employed male worker. 11 For ti computation, te data from te urvey are not comparable to te later urvey. For te early year, week worked lat year are reported only on a bracketed bai and uual our worked per week lat year are not reported. In order to impute te continuou value for week worked lat year, I divide te data from te urvey into cell according to week worked and ue te cell mean for week worked a te correponding week data for te early year. 8

11 worked for toe employed in eac income decile. 12 Oter income (Q) i calculated a te difference between te average total oueold income and te average earning of ead and poue. Tu, it include earning of oter oueold member and nonlabor income Cange in te Component of Houeold Income, Figure 1 to 7 and Appendix Table preent te etimate of te mean total family income and eac of te component of te mean family income for eac income decile for 1969, 1979, 1989, and It i well documented tat meaure of family income inequality increaed ince te late 1960 and accelerated in te Te income gap between te top and bottom income decile, te primary meaure of oueold income inequality employed in ti tudy, confirm te long-term rie in te family income inequality. A preented in Figure 1, te average income of te top 30 percent familie increaed rapidly wile te income of low- and middle-income familie tagnated or even declined. During te tree decade, te average income of te top 10 percent familie increaed by 57 percent, a compared to a 40 percent decline among te familie in te bottom income decile. In particular, te 1990 witneed te mot dramatic rie in te income diparity between ric and poor familie. During te decade, te average income of te ricet 10 t familie increaed by 30 percentage point 12 For ti calculation, te following metod wa ued: Firt, I multiply our worked in te week prior to te urvey and week worked for toe wo worked at leat one our lat week. LW Ti etimate of annual our worked, denoted by H, ould differ from te actual annual LY our, H, becaue (1) toe wo worked lat week are not te ame people a toe wo worked lat year, and (2) our worked lat week may differ from uual our worked lat year. LW LY To ee te ize and pattern of te dicrepancy, I compare H and H uing data from te LW LY CPS. For eac income decile, H i only ligtly greater tan H. More LW LY important, te relative ize of H and H i fairly table acro income decile. I derive LY LW adjutment factor by dividing H by H and apply tem to te data from te urvey to obtain more accurate etimate of annual our worked. I alo imputed annual our worked for te early year following te procedure explained in Jun (1992: appendix 1). A far LW a te average our worked for eac income decile i concerned, H i a cloer LY approximation of H tan te imputed value. 13 Te average family ize, reported in Appendix Table, doe not differ muc from one income declie to anoter. More importantly, te average family ize of eac income decile canged over time in a imilar manner. Terefore, te pattern of cange in te family income component and teir relative contribution to te rie in family income inequality tat will be given below do not cange muc if te average per capita family income i conidered. 9

12 werea te income of all familie grew by about 6 percentage point. A a conequence, te difference in te log of te total family income between te top and bottom decile, denoted N above, increaed by 0.96; more tan alf of te increae (0.5355) wa attributed to te cange between 1989 and Figure 2 ugget tat ift in te ourly wage rate of family ead ( W ) wa probably not a powerful caue of te rie in te family income inequality until te Wage for family ead ligtly fell or remained uncanged for low- and middle-income familie between 1969 and Altoug wage for te familie in te top tree income decile ligtly increaed, te difference between ig- and low-income familie wa relatively mall. During te 1990, on te oter and, te average wage for te top 10 t familie greatly increaed in arp contrat to te relatively table wage rate for te familie in te ret of income ditribution. Tu, te wage cange ould ave increaed te income inequality to a greater extent during te 1990 tan it did in te previou two decade. It i well documented in oter tudie ow labor upply of men and women wit different earning potential ave canged over time (Jun 1992, Cancian, Danziger, and Gottcalk 1993, Jun and Murpy 1997). Te preent paper provide a picture of long-term cange in te element of labor upply for a more broadly defined population, namely all familie. Te overall employment rate for family ead (P ) fell ubtantially over te tree decade under invetigation, particularly during te 1970 and te Te decline in P wa muc greater for lower income familie tan for iger income familie. For intance, P fell 14 percentage point for te bottom income decile werea it declined by 5 percentage point or le for te top tree income decile (Figure 3, and Table A1, row 3). Cange in annual our worked for family ead (H ) exibit a imilar pattern. Te decline in our wa particularly pronounced for te bottom two income decile, epecially from 1969 to 1989 (Figure 4 and row 4 of Table A1). We may predict from tee pattern tat uneven cange in P and H ould be at leat partly reponible for te rie in te family income inequality. Te fraction of uband and wife familie (δ ) familie in lower alf of income ditribution fell coniderably between 1969 and 1979, and rebounded during te next decade, except for te lowet income decile. In conequence, te decline in δ between 10

13 1969 and 1989 i viible only for te lowet income decile. Between 1989 and 1999, δ arply declined for all familie, but more everely for lower-income familie; δ remained relatively table for te top two income decile (row 9 of Appendix Table). In um, family tructure ad canged in te direction to increae te family income inequality, epecially between 1969 and 1979 and between 1989 and It ould be kept in mind tat ti tatitic diguie dramatic cange in te living arrangement and riing intability of te family becaue non-family oueold are excluded from te ample. I will return to ti point later. Over te period under tudy, te ourly wage for employed poue ( W ) increaed muc fater for ig-income familie tan for lower-income familie (Figure 5). Te diparity in te poue wage growt between ric and poor familie i muc more pronounced tan tat of ead. For example, W for te top income decile more tan doubled between 1969 and 1999 werea W for te bottom tree decile remained little canged. Ti indicate tat te cange in W ould be a major ource of te rie in te family income inequality over te tree decade ince A te female labor-force participation rate increaed, te proportion of employed poue ( P ) roe coniderably. A illutrated by Figure 6, te rie in P wa generally greater among middle- and ig-income familie. For te top income decile, P increaed from 59 percent to 88 percent between 1969 and On te oter and, tere wa no gain for wive in te lowet 10 t familie. Ti reult indicate tat te labor-force participation of poue canged in te direction to magnify te family income inequality. Te average annual our of work of employed poue ( H ) a increaed for familie in all income decile (Figure 7). In particular, wive in middleincome familie increaed te our of work te mot. Ti outcome tend to ugget tat te effect of cange in in magnitude. H on te family income inequality, if any, ould be mall 5. Decompoition of te Cange in Family Income Inequality Te pattern of te cange over time in te component of oueold income, reviewed te preceding ection, allow u to predict te direction of teir contribution to 11

14 te ift in oueold income inequality. For intance, ourly wage of ead ould ave been a minor factor tat caued te decline in oueold income inequality between 1969 and Alo, cange in te employment rate and te our of work for ead ould ave ubtantially contributed to te widening of te income gap between te ric and te poor for te period under tudy. In te following two ection, I analyze in detail ow cange in eac of te component contributed to te ift in te oueold income inequality. I begin wit a baeline decompoition of te cange in te difference in te log of te total family income between te top and bottom income decile baed on equation (3). 5.1 A Baeline Decompoition Table 2 preent te reult of a baeline decompoition in wic te ample of familie eaded by a ead aged 18 to 64 are included and te difference in te log of income between te top and bottom income decile i ued a te meaure of family income inequality. For te entire period between 1969 and 1999, in wic te difference in te log of family income between te top and bottom decile increaed by 0.96, cange in oter income (Q) and labor upply of ead and poue (P, H, and P ) explain more tan alf of te rie in te meaure of family income inequality (ee te final column of Table 2). Te increaed inequality in oter income (Q) account for 29 percent of te rie in te family income inequality between 1969 and Altoug Q account for relatively mall fraction of te total family income, te difference in Q between te ig- and low-income familie increaed o rapidly during te tree decade to produce a trong impact on te rie in te overall family income inequality. 14 A will be own below, te effect of te cange in oter income i completely explained by te relative decline of oter income of low-income familie. Cange in employment and our worked explain anoter 28 percent of te rie in te family income inequality between 1969 and In particular, cange in te our worked and te employment rate for ead (tat explain, repectively, 13 percent and 9 percent of te increae in te income 14 In 1999, for example, Q wa 6196 dollar, about 17 percent of te mean total family income. Between 1969 and 1999, te rate of increae in Q wa muc iger for te familie in te top income decile (31 percentage point) tan for te lowet income decile (-44 percent). 12

15 diparity) were major contributing factor, wit cange in te employment rate of poue accounting for anoter 7 percent of te increae in te meaure of inequality. It i triking tat tructural cange in wage, largely regarded a te major culprit of te increae in income inequality, explain le tan a quarter of te rie in te meaure of family income inequality. Te effect of te wage cange of ead and poue were almot equally important. Canging family tructure, meaured by te fraction of familie wit bot uband and wife (δ ), wa nontrivial factor of te rie in family income inequality. It account for 11 percent of te widening of te income gap between te top and bottom income decile. Cange in te compoition of te income ource account for te remaining 16 percent of te rie in te meaure of inequality. Firt of all, te rie in te are of poue earning ( Φ ) trongly increaed te meaure of income inequality (ee row 10 of Table 2). Since te percentage of familie wit married couple and te employment rate of poue a well a te mean earning of employed poue are muc lower for lower-income familie tan ricer familie, te diparity in poue earning i muc greater tan te inequality in ead earning or oter income. During te tree decade under tudy, te are of poue earning in te total family income increaed from 13 percent to 31 percent. About two tird of te effect of increaed are of poue earning were offet by te countervailing effect of te decline of te are of ead earning and te increae in te relative ize of oter income. 15 Te firt tree column of Table 2 preent te reult of te decompoition for eac of te tree decade. According to te meaure of inequality ued in ti tudy, te growing family income inequality accelerated during te Te upurge in te income gap between te top and bottom income decile between 1989 and 1999 wa greater tan te rie in te meaure of inequality during te previou two decade combined. Te relative contribution of eac of te component of family income coniderably differed by decade. Firt of all, te relative importance of canging labor upply, epecially te employment rate for ead, declined over time. During te Te are of ead earning fell from 71% in 1969 to 52% in Te percentage of oter income in te total family income increaed from 15.9 percent in 1969 to 16.9 percent in

16 year between 1969 and 1979, cange in employment and our of ead and poue accounted for nearly two tird of te increae in te meaure of income inequality. Te proportion explained by canging labor upply decreaed to 33 percent in , and to 28 percent by On te oter and, te relative importance of te effect of canging wage increaed over time: te percentage of te rie in te meaure of inequality accounted for by wage cange wa 10 percent in te 1970, 4 percent in te 1980, and 39 percent in te Te relative impact of canging ditribution of oter income (Q) decreaed over time Rigt Tail v. Left Tail of te Income Ditribution A widening of te income diparity between te top and bottom income decile could reult from eiter a fater growt of income of te ricet 10 t familie or deterioration of te poition of te lowet 10 t familie, in comparion wit te familie in te middle. Likewie, te relative contribution of eac of te component of family income could come from eiter left or rigt tail of te income ditribution. Similar decompoition, alo baed on equation (3), are conducted eparately for te difference in te log of income between te top 10 t and te average, and between te average and te bottom 10 t familie. Te reult are reported in Table 3 and 4. Te reult ugget tat 70 percent of te increae in te income difference between te top and bottom 10 t familie were produced by deterioration of te poition of te pooret 10 t relative to te familie in te middle. During te decade between 1969 and 1979, in particular, te widening of te income diparity between te ric and poor familie i completely explained by te relative decline of te bottom 10 t familie. Ti indicate tat te arp rie of te family income inequality wa largely due to te collape of low-income familie. For te upper alf of te income ditribution, wage cange were te dominant caue of te increae in te meaure of family income inequality. Canging ead wage account for more tan alf of te increae in te difference between te income of te top 10 percent familie and te average income; canging wage of poue explain anoter 28 percent. Te cange in te proportion of familie wit bot uband and wife wa te oter major factor of riing income inequality. Te cange in oter income did not increae te meaure of family income inequality. Te overall effect of 14

17 cange in labor upply and te compoition of income ource were trivial. For te lower alf of te income ditribution, in arp contrat to te reult for te upper alf, cange in labor upply and oter income were te principal caue of te growing ditance between te poor and middle-income familie. Sift in employment and our worked account for 36 percent of te increae in te difference between te income of te lowet 10t familie and te average income. Cange in oter income account for 38 percent, indicating tat te effect of cange in oter income reported in Table 2 i completely explained by te relative decline of oter income of low-income familie. Only 8 percent of te increae in te meaure of inequality wa attributable to wage cange. Cange in te compoition of income ource and te proportion of familie wit bot uband and wife explain 12 percent and 11 percent of te riing income diparity between te familie in te middle and toe at te bottom, repectively Income Diparity between te 2 nd and 9 t Decile Te difference in te log of income between te top and bottom 10 t familie, ued above a te meaure of oueold income inequality, may not deliver te full picture of canging inequality. By focuing on te gap between te ricet and te pooret, in particular, it fail to capture any cange in te middle of te income ditribution. In order to upplement ti weakne at leat partially, a imilar decompoition metod i applied to te difference in income between te econd and nint income decile. Te reult i reported in Table 5. Te rie in te difference in te log of income between te econd and nint decile between 1969 and 1999 (0.5477) wa about 60 percent in magnitude of te increaed income gap between te iget and lowet 10 t familie. Te relative importance of te effect of eac income component i coniderably different between te two reult. Cange in wage, epecially of ead, were muc more powerful caue of te widening income diparity wen te top and bottom 10 percent familie were excluded from te decompoition. Wage cange alone explain 38 percent of te rie in te meaure of income inequality. On te oter and, te influence of labor upply cange wa muc maller for te income inequality between te familie in te econd and nint decile. Ti pattern i generally true for eac of te tree decade, but 15

18 more clearly oberved for te 1980 during wic wage cange accounted for 85 percent of te rie in te meaure of income inequality. 6. Senitivity of te Reult to te Coice of Population Altoug te population coen above, namely familie eaded by working age peron, i widely ued in te tudy of income ditribution and poverty, tere i no tandard rule to elect ample to be tudied. Te pattern of living arrangement and te family tructure ave dramatically canged over te tree decade under invetigation. Tu, te population compared above between 1969 and 1999 may be different in variou apect, and a cange in te population covered by te tudy may lead to a different concluion. I repeat te ame decompoition uing everal alternative ample covering different population to examine weter te reult obtained above i enitive to te coice of population. I begin wit analyzing a broader population, namely, all oueold including non-family oueold. Te proportion of non-family oueold increaed from 19 percent in 1969 to 31 percent in 2000 (U.S. Bureau of te Cenu 1996, No. 66; U.S. Bureau of te Cenu 2004, No. 56). We tu tend to look at increaingly narrow egment of te population over time by focuing on family oueold. Given tat nonfamily oueold are overrepreented in lower-income oueold, we may ave a different reult if ti broader ample i ued. Te firt column of Table 6 preent te reult. Te etimated meaure of te rie in te family income inequality (0.9576) and te relative ize of eac component contribution to te increae in income inequality are remarkably imilar to te reult baed on te ample of familie reported in Table 2. Te only notable difference i te relatively greater contribution of te cange in te employment rate for ead (13 percent) were all oueold are concerned. Te next iue to be addreed wit regard to te coice of te ample i te age range of family ead. Altoug peron aged 18 to 64 are largely regarded a te working-age population, it i not fully comparable acro different time for te following reaon. Firt, te college enrollment coniderably increaed between 1970 and 2000, diminiing te proportion of young family ead covered by ti tudy 16

19 (becaue te familie woe ead are enrolled in cool are excluded). 16 Second, te typical retirement age a diminied a early retirement (defined a leaving te labor force permanently at age younger tan 65) became increaingly common. 17 To reduce te effect of te cange in te typical working age, I retrict te ample to familie eaded by peron aged 25 to 55. Te reult of te decompoition baed on ti ample i reported in te econd column of Table 6. Altoug te reult baed on all familie and familie eaded by prime-age peron are not perfectly matced, teir implication are not muc different from eac oter. Similar to te reult for all familie, canging labor upply explain about a tird of te increae in te meaure of te family inequality; wage cange account for anoter 31 percent. Notable difference are relatively mall effect of te ift in te compoition of income ource and a large impact of canging family tructure. Anoter prominent cange in te family tructure over te lat everal decade i te rie of te proportion of female-eaded familie. In 1970, le tan 11 percent of familie were eaded by women (U.S. Bureau of te Cenu 1996, No. 66); now, 18 percent of familie are female-eaded (U.S. Bureau of te Cenu 2004, No. 60). Moreover, te growt of female-eaded familie wa particularly pronounced among low-income familie. In conequence, female-eaded familie currently account for more tan alf of te lowet 10 t familie. To eliminate te effect of cange in te working age and family tructure introduced above, I decompoe te rie in te family income inequality uing te ample of familie eaded by male aged 25 to 55 (See column 3 of Table 6). Te magnitude of te increae te meaure of income inequality between 1969 and 1999 for ti ample (0.6485) i ligtly greater tan alf of te etimate obtained from te ample of familie eaded by prime-age peron (1.2390), and about two tird of te etimate for all familie eaded by working age peron (0.9600). Ti reult indicate tat growing intability of te family i a major factor of te riing family income inequality. Te relative contribution of eac of te component of family income i alo 16 Te cool enrollment rate for peron aged 18 to 19 increaed from 47.7 percent in 1970 to 61.2 percent in Te ame rate for individual aged 22 to 24 increaed from 14.9 percent to 24.6 percent during te tree decade (U.S. Bureau of te Cenu 2004, No. 206). 17 Te labor force participation rate of men aged 55 to 64 declined from 73 percent in 1980 to 67 percent in 2000 (U.S. Bureau of te Cenu 2004, No. 570). 17

20 quite different. In particular, wage cange were te mot powerful factor of te increae in te income inequality among te familie eaded by prime-age male. However, imilar to te reult for te full ample, labor upply cange explain 31 percent of te rie in te meaure of income inequality. 7. Concluion Ti tudy a etimated wat fraction of te rie in family income inequality in te United State between 1968 and 2000 i accounted for by cange in eac of te family income component uc a wage, employment, and our worked of family ead and poue, family tructure, and oter income. Te increaed diparity in oter income (Q) account for 29 percent of te rie in te difference in income between te top 10 t and bottom 10 t familie. Cange in employment and our worked explain 28 percent of te rie in te family income inequality between 1969 and More pecifically, cange in te our worked and te employment rate of ead explain, repectively, 13 percent and 9 percent of te increae in te income diparity, and cange in te employment rate of poue account for anoter 7 percent. Structural cange in wage, largely regarded a te major culprit of te increae in income inequality, explain le tan a quarter of te rie in te meaure of family income inequality. Canging fraction of familie wit bot uband and wife account for 11 percent of te widening of te income gap between te top and bottom income decile. Cange in te compoition of te income ource explain te remaining 16 percent of te rie in te meaure of inequality. Te relative contribution of eac of te component of family income coniderably differed by decade. In particular, te relative importance of te effect of canging labor upply, epecially tat of te employment rate for ead, declined over time. On te oter and, a muc greater percentage of te rie in family income inequality during te 1990 i explained by canging wage compared to te previou two decade. Te arp rie of te family income inequality wa largely due to te collape of low-income familie. About 70 percent of te increae in te income difference between te top and bottom 10 t familie were produced by deterioration of te poition of te pooret 10 t relative to te average oueold. For te upper alf of te income 18

21 ditribution, wage cange were te dominant caue of te increae in te meaure of family income inequality. For te lower alf of te income ditribution, in arp contrat, cange in labor upply and oter income were te principal caue of te growing ditance between te poor and middle-income familie. If te familie in te econd and nint income decile are compared, cange in wage, epecially of ead, were muc more powerful caue of te widening income diparity. Te reult of decompoition baed on alternative ample (all oueold including familie and ingle oueolder, familie eaded by prime-age peron, and familie eaded by prime-age male), toug coniderably different from one anoter, provide generally imilar implication. It i epecially notable tat canging labor upply explain about a tird of te rie in te meaure of family income inequality between 1969 and 1999 (28 percent to 36 percent), no matter wic ample i coen. Te mot triking reult of ti tudy i tat wage cange of ead and poue explain only a modet fraction of te widening of te income gap between te top and bottom 10 t familie. Prior to te 1990, in particular, le tan 10 percent of te rie in te meaure of family income inequality reulted from wage cange. On te oter and, canging employment and our exerted tronger impact on te increae in family income inequality tan previouly tougt. Te influence of canging labor upply wa particularly powerful prior to 1990, accounting for 63 percent and 33 percent of te rie in meaure of family income inequality during te 1970 and 1980, repectively. In particular, te relative decline in te employment rate and our worked among poor oueolder were te ingle mot important caue of te collape of te familie at te bottom of income ditribution between 1969 and Along wit canging employment and our of work, te relative decline in oter income of low-income familie wa an important caue of te rie in te diparity in family income. Since oter income of te lowet 10 t familie are largely compoed of tranfer income, relative decline of teir oter income may ave been in part produced by cange in government income ditribution policy. It may alo be partly attributable to te rie in capital income of middle- and ig-income familie ince te mid Te capital income are in te U.S. peronal income increaed from around 13 percent in te 19

22 Anoter intereting reult i tat te 1990 wa ditinct from te previou two decade in term of te magnitude and te mecanim of rie in family income inequality. Te rie in te meaure of family income inequality during te 1990 wa more tan twice a large a toe of te previou two decade combined. In contrat to te 1970 and 1980 during wic te rie in family income inequality wa largely produced by te relative decline of bottom 10 t familie, about two tird of te increae in family income inequality during te 1990 reulted from te fater income growt of te ricet 10 t familie compared to entire familie. Wage cange were a muc more important factor of te rie in family income inequality for te 1990 tan for te previou two decade. Tee peculiar feature of te 1990 may be explained by te dramatic increae in te wage of top 10 percent alary earner ince te mid-1990 (Piketty and Saez 2001). Te reult of ti tudy ugget tat te rie in te income diparity between ric and poor familie over te lat tree decade can not imply be explained by growing wage inequality tat a been igligted. Te relative decline of employment, our, and non-labor income of te familie at te bottom were more important factor of riing family income inequality, epecially prior to Rie in te number of ingle-parent familie wa anoter non-trivial factor. Given tat cange in employment, our, non-labor income, and family tructure ad particularly trong impact on te relative decline of te familie at te bottom, tee factor ould be conidered more eriouly tan wage cange in addreing poverty iue tat could be more crucial for te wellbeing of te people tan inequality per e. early 1970 to 20 percent in 1990 (Piketty and Saez 2001). 20

23 Reference Autor, D., Katz, L, F., and Krueger, A, B. (1988), Computing Inequality: Have Computer Canged Te Labor Market? Quarterly Journal of Economic, 1988, Berman, E., Bound, J., and Grilice, Z. (1994), Cange in te Demand for Skilled Labor witin U. S. Manufacturing: Evidence from te Annual Survey of Manufacture, Quarterly Journal of Economic 109(2), Blank, Rebecca M. (1997), It Take A Nation: A New Agenda for Figting Poverty, Princeton Univerity Pre. Boijoly, J., G. Duncan, and T. Smeeding, "Te Sifting Incidence of Involuntary Job Loe from 1968 to 1992," Indutrial Relation 37, 1998, Borja, G, J., Freeman, R, B., and Katz, L, F. (1997), How Muc Do Immigration and Trade Affect Labor Market Outcome? Brooking Paper on Economic Activity 1. (1992), On Te Labor-Market Effect of Immigration and Trade, in Borja, G, J., and Freeman, R, B., ed, Immigration and Te Work Force, Cicago Univerity Pre. Bound, J., and Jonon, G. (1992), Cange in Te Structure of Wage in te 1980: An Evaluation of Alternative Explanation, American Economic Review 82 Brennaan, T, F., Brynjolfon, E., and Hitt, L, M. (2002), Information Tecnology, Wokrplace Organization, and Te Demand for Skilled Labor: Firm-Level Evidence, Quarterly Journal of Economic, Burtle, G. (1990), Earning Inequality over te Buine and Demograpic Cycle, in Burtle, G., ed., A Future of Louy Job? Te Canging Structure of U. S. Wage. Waington DC: Brooking Intitution, (1993), Te Contribution of Employment and Hour Cange to Family Income Inequality, American Economic Review Paper and Proceeding, 83, Cancian, M., Danziger, S., and Gottcalk, P. (1993), Working Wive and Family Income Inequality Among Married Couple, in Danziger and Gottcalk, ed., Uneven Tide. New York: Ruell Sage Foundation, Dom, M., Dunne, T., and Troke, K, R. (1997), Worker, Wage, and Tecnology, Quarterly Journal of Economic 112, Feentra, R, C., and Hanon, G, H. (1999), Te Impact of Outourcing and Hig- Tecnology Capital on Wage: Etimate for te United State, , Quarterly Journal of Economic 114. Freeman, R, B., and L. F. Katz, ed (1995), Difference and Cange in Wage Structure, Cicago: Univerity of Cicago Pre,

24 Fortin, N, M., and Lemieux, T. (1997), Intitutional Cange and Riing Wage Inequality: I Tere A Linkage? Journal of Economic Perpective 11, Gottcalk, P. (1997), Inequality, Income Growt, and Mobility: Te Baic Fact, Journal of Economic Perpective 11, Gottcalk, P., and R. Moffitt (1999), Cange in Job Intability and Inecurity Uing Montly Survey Data, Journal of Labor Economic 17, 1999, S92-S126. Gottcalk, P., and Smeeding, T. M. (1997), Cro-National Comparion of Earning and Income Inquality, Journal of Economic Literature 35. Haveman, R. (1996), Earning Inequality: Te Influence of Canging Opportunitie and Coice. Waington DC: Te AEI Pre. Hunt, J. (1992), Te Impact of te 1962 Repatriate from Algeria on te Frenc Labor Market, Indutrial and Labor Relation Review, 45, 1992, Hylop, Dean R. (2001), Riing U.S. Earning Inequality and Family Labor Supply: Te Covariance Structure of Intrafamily Earning, American Economic Review 91, No. 4, Jun, C. (1997), Decline of Male Labor Market Participation: Te Role of Declining Market Opportunitie, Quarterly Journal of Economic 107, 1992, Jun, C., and K. M. Murpy (1997), Wage Inequality and Family Labor Supply, Journal of Labor Economic 15, Katz, L, F., and K. M. Murpy (1992), Cange in Relative Wage, : Supply and Demand Factor, Quarterly Journal of Economic 107, Krueger, A, B. (1993), How Computer Have Canged Te Wage Structure: Evidence From Microdata, , Quarterly Journal of Economic 108, Lee, C. (2001), Cange in Employment and Hour, and Family Income Inequality in te United State, , International Economic Journal 15, Levy, F., and R. J. Murane (1992), U. S. Earning Level and Earning Inequality: A Review of Recent Trend and Propoed Explanation, Journal of Economic Literature 30. Miller, T, C. (2001), Impact of Globalization on U. S. Wage Inequality: Implication for Policy, Nort American Journal of Economic and Finance 12, Mofitt, R. (1990), Te Ditribution of Earning and te Welfare State, in Burtle, G., ed., A Future of Louy Job? Te Canging Structure of U. S. Wage, Waington DC: Brooking Intitution, (1995), Current Population Survey: Marc Indiviual -Level Extract, , Inter-univerity Conortium for Political and Social Reearc, OECD (1996), Earning Inequality, Low-Paid Employment and Earning Mobility, Employment Outlook, July,

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