The Price of Work: Understanding Wage Inequality by Estimating Task Prices

• Applicant: Professor Dr. Michael J. Böhm
• Subject Area: Economic Policy, Applied Economics
• Term: from 2016 to 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 315272032

Over the last decades, median wages have dropped substantially relative to wages in the upper parts of the income distribution throughout the developed world. At the same time, the number of middle-income jobs declined steadily. This has generated an intense debate about whether the rise of routinization technology, which automates a lot of middle-income but not many low- or high-income jobs, is responsible for these trends. Routinization predicts that, if the skill composition of workers does not change, observed median wages and wages in middle-income jobs should not only fall compared to wages at the top, but also at the bottom. However, this only happened in the United States, while wages in low-income jobs and in the lower end of the wage distribution dropped even further in Europe and in Canada. It thus remains an open question whether middle-income (and low-income) workers' rising troubles have been driven by pervasive changes in technology or whether they are due to policy decisions in the different countries, and therefore reversible. The key to answering this question are task prices, that is, prices that are paid for a unit of skill across jobs. Observed wage changes in different jobs and in different parts of the income distribution are blurred by composition effects, as workers of different skills move across jobs and quantiles of the wage distribution over time. For example, many production jobs in the manufacturing sector have disappeared with the rise of industrial robots and automated production processes. Empirically, while the price of the tasks that production workers did before automation has dropped, observed average wages in manufacturing jobs may have increased because the remaining workers are more highly skilled. Therefore, in order to evaluate the effects of technological change on wages, one needs to disentangle task prices from composition effects. The proposed project develops a new method for estimating changes in task prices. This method is based on a recent theoretical result of mine that links workers' wage growth and their sorting into jobs to changing task prices. Longitudinal data on workers and firms, which are by now widely available, enable the empirical implementation of this result. Together, the new theoretical insight and the data will lead to a substantial improvement upon existing approaches of estimating task prices. There are several additional and related applications of the new estimation method for task prices. For example, what are the drivers of the surging earnings in the financial sector in many countries? Why did wages in low-skill service jobs drop while employment increased? Are women's earnings rising compared to men's earnings because they are specialized in jobs for which demand has increased? Estimating the task prices will provide new answers to these and to other important questions.

• DFG Programme: Research Fellowships
• International Connection: Canada
• Host: Professor Thomas Lemieux, Ph.D.