DP2153 | Coping with Technological Progress: The Role of Ability in Making Inequality so Persistent

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This study explains the evolution of wage inequality over the last 30 years and supports this explanation with evidence. At each level of schooling, a faster rate of technological progress weakens the link between schooling and work and increases the unknown needed to cope with during one's working life. Coping with the unknown demands ability. By accentuating the role of ability, technological progress increases wage inequality within each group of education as well as between education groups. Inasmuch as education is an irreversible investment, the rise in within group inequality boosts up the rise of between group inequality. Guided by this theory we turn to the PSID for evidence. Using parents' education to approximate child's ability we show the following set of results: (a) Controlling for education of the child, parents' education contributes a lot more in the 1980s to his wage growth than in the 1970s. (b) The correlation between the parents' and the child's education increases from the 1970s to the 1980s. (c) The return to college education to the individual who has no ability rents has not changed - it remains steady at the reasonable number of 23 percent. (d) The uncertainty of post-college wage increases relative to the uncertainty of post-high school wages over the same period. (e) It is parents' education and not parents' income that explains the wage growth of their children.