Understanding between and within-group wage inequality through the lens of the 2007 financial crisis

• Main Authors: Yeong, Glenn, Soh, Nicholas, Seet, Qi Hao
• Other Authors: Tang Yang
• Format: Final Year Project
• Language: English
• Published: 2015
• Subjects: DRNTU::Humanities::General
• Online Access: http://hdl.handle.net/10356/62506
• Institution: Nanyang Technological University

In this paper, we first document several stylized facts on the U.S labour market before and after the financial crisis, specifically: (i) The overall wage inequality takes the form of a U-shaped curve; (ii) The wage dispersion amongst low-skill jobs increased during the financial crisis, but decreased after the crisis; (iii) Conversely, the wage dispersion amongst high skilled jobs decreased during the financial crisis but subsequently increased after the crisis; (iv) There is an increasing employment share of high-skill jobs from 2003-2011. These motivate the following questions: Why is there a U-shaped trend before and after the financial crisis? Why does wage dispersion respond asymmetrically to the financial crisis between high and low skill jobs? We then develop a theoretical framework to study the underlying mechanism that can potentially account for those facts. Taken altogether, our model predicts that changes in relative productivity of high-skill and low-skill jobs have shaped between and within-group wage inequality trends between 2003 and 2011. This has also been empirically tested by regressing relative wages/ productivity (A_H/A_L ) against income inequality (90/10 ratio), where the results are found to be statistically significant.