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The Evolution of Unobserved Skill Returns in the U.S.: A New Approach Using Panel Data

Author

Listed:
  • Lance Lochner
  • Youngmin Park
  • Youngki Shin
Abstract
Economists disagree about the factors driving the substantial increase in residual wage inequality in the United States over the past few decades. To identify changes in the returns to unobserved skills, we make a novel assumption about the dynamics of skills (especially among older workers) rather than about the stability of skill distributions across cohorts, as is standard. We show that this assumption is supported by data on test score dynamics for older workers in the Health and Retirement Study. Using survey data from the Panel Study of Income Dynamics and administrative data from the Internal Revenue Service and the Social Security Administration, we estimate that the returns to unobserved skills declined substantially since the mid-1980s despite a sizable increase in residual inequality. Instead, the variance of skills rose over this period due to increasing variability in idiosyncratic lifecycle skill growth. We extend our framework to consider occupational differences in returns to skill and multiple unobserved skills and show that returns to skill display similar patterns for workers employed in cognitive, routine and social occupations.

Suggested Citation

  • Lance Lochner & Youngmin Park & Youngki Shin, 2017. "The Evolution of Unobserved Skill Returns in the U.S.: A New Approach Using Panel Data," Staff Working Papers 17-61, Bank of Canada.
    • Handle: RePEc:bca:bocawp:17-61
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    References listed on IDEAS

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    Cited by:

    1. Lochner, Lance & Park, Youngmin, 2024. "Earnings dynamics and intergenerational transmission of skill," Journal of Econometrics, Elsevier, vol. 243(1).

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    More about this item

    Keywords

    Econometric and statistical methods; Labour markets;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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