Explaining International Differences in Male Wage Inequality by Differences in Demand and Supply of Skill

Wage differentials between skill groups are larger in the US than in most western European countries. Especially low skilled workers are relatively worse off in the US than elsewhere. A simple demand and supply explanation for this fact would be that relative net supply of low skilled workers in the US exceeds that of other countries. The study by Blau and Kahn (1996) rejects this explanation. The present paper shows that this rejection depends heavily on the measure of skill that has been used. Blau and Kahn measure a worker's skill level as a weighted average of his schooling level and experience. Using this measure for comparisons across countries assumes that years of schooling and experience mean the same in terms of skill in all countries. When we use a measure of skill that is arguably more fit for international comparisons we find reasonable support for a demand and supply explanation of differences in wage inequality. This findings survives a large number of sensitivity tests