A Multisector Perspective on Wage Stagnation; Rachel Ngai (London School of Economics)

Abstract

Low-skill workers are concentrated in sectors that experience fast productivity growth and yet their wages have been stagnating. We document evidence from U.S. states showing that a multisector perspective is crucial to understanding this divergence and stagnation. Key to our mechanism is the fall in the relative price of the low-skill sector caused by faster productivity growth. When outputs are complements across sectors, this leads to labor reallocation into the high-skill sector where the marginal product of low-skill workers is stagnant. It accounts for low-skill wage stagnation, its divergence from aggregate labor productivity, and the rise in wage inequality from 1980 to 2010.

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