9.1.3Within Group Inequality

Within group inequality is explained by factors based on covariates other than age and education. As a matter of fact, this type of inequality increased steadily after 1970 for groups defined by education, age/experience and gender (they were 30% greater in 1987 than in 1970). Several factors can explain this increase. One factor is increasing returns to skill. Indeed, according to Levy and Murnane,

‘A change in the desired skill mix of workers within industry, brought about by non-neutral technological change, has increased the value of skilled vs. less skilled workers.’

Still, evidence on this hypothesis is limited and increasing returns to skill do not seem to be the only reason for within group variation. Another factor explaining the increase in within group inequality is the increasing industry specific wage differentials within industry. Indeed, Levy and Murnane found that in the 1970s, 25% of within group earnings inequalities were due to differences in wages paid to equally able workers across industries. Finally, changing wage setting institutions and the decline in unionization in the 1980s may have increased within group inequality, as discussed next.

Before moving on to the next section, Figure 9.1 reports the main explanations that have been given for the trends in income inequality since the 1970s. The following sub-sections concentrate on two of those determinants: institutional changes and supply-side explanations.