Two Sides of the Same Coin: U.S. "Residual" Inequality and the Gender Gap

In this paper we show that the two major developments experienced by the US labor market - rising inequality and narrowing of the male-female wage gap - can be explained by a common source: the increase in price of cognitive skills and the decrease in price of motor skills. We obtain the price of a multidimensional vector of skills by combining a hedonic price framework with data on the skill requirements of jobs from the Dictionary of Occupational Titles (DOT) and workers’ wages from the CPS. We find that in the 1968-1990 period the returns to cognitive skills increased 4-fold and the returns to motor skills declined by 30%. Given that the top of the wage distribution of college and high school graduates is relatively well endowed with cognitive skills, these changes in skill prices explain up to 40% of the rise in inequality among college graduates and about 20% among high school graduates. In a similar way, because women were in occupations intensive in cognitive skills while men were in motor-intensive occupations, these skill price changes explain over 80% of the observed narrowing of the male-female wage gap.