WAGE DISPERSION, RETURNS TO SKILL, AND BLACK-WHITE WAGE DIFFERENTIALS

During the 1980s wage differentials between different age and educatio n groups expanded rapidly. Wage dispersion among individuals with the same age and education also rose. A simple explanation for both sets o f facts is that earnings vary with a one-dimensional index of skill an d that the relative return to higher levels of skill rose over the dec ade. We explore a simple method for estimating and testing such a 'sin gle-index' model of wages. Our approach integrates three aspects of sk ill: age, education, and unobserved ability. We find that a one-dimens ional skill model provides a reasonably accurate, although oversimplif ied, description of changes in the structure of wages for white men an d women between 1979 and 1989. We then use the estimated models for wh ite women and white men to interpret recent changes in the relative wa ges of African American workers.