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2 - employment, wages, and benefits

Factors driving high- and low-skilled workers' wages farther apart

Why did workers’ earnings become more unequal during the 1980s and early 1990s? Experts disagree on the exact causes, but five factors are generally cited—technological change, trade liberalization, increased immigration, reduced value of the minimum wage, and declining unionization. Real wages of high-skilled workers increased on average while the real wages of low-skilled workers tended to decline.

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Who are the working poor?

Technological change. Higher-skilled workers are at a premium when new technologies are introduced because they are better able to use them. Technological change has increased the demand for skilled workers in all industrialized countries, despite significant differences with regard to trade, labor market institutions, and unemployment. At the same time, technological advances have led to some lesser-skilled jobs being replaced by new, automated devices.

Trade. Expanded trade can drive down the wages of low-skilled workers because it displaces the goods they produce.9

Immigration. Immigration has increased significantly since 1965, particularly among less-skilled workers with lower education levels, causing greater competition for unskilled jobs and lower wages for unskilled workers.

Minimum wage and unionization. The decline in the real value of the minimum wage and declining unionization have also contributed to the decline in earnings for low-wage workers. The federal minimum wage declined considerably in real value during the 1980s, because it remained fixed at $3.35 per hour despite price increases. After having reached a postwar peak in 1968, the minimum wage fell in real terms during both the 1970s and 1980s, reaching a level in 1990 significantly below its 1960 level. Failure to raise the minimum wage during the 1980s left low-wage workers further behind.10 Future legislated increases in the minimum wage would help to reduce or stabilize wage inequality.

Declining unionization in the 1980s has also contributed to increased wage inequality. The American labor movement has always had a goal to help workers earn more and thereby gain access to the middle class. With declines in union membership, fewer workers benefited from the higher wages typically achieved through collective bargaining. The impact is probably the greatest on men, whose union membership rates (in private-sector employment) fell by 50 percent between 1973 and 1993.11

Mom, how come all of my teachers are girls?

Alden Green
Age 5

Pay gaps persist between groups

Pay gaps between different groups of American workers—between men and women, between whites and minorities, and between people with disabilities and those without—are another dimension of wage inequality. Though they have narrowed over the past several decades as a result of passage and enforcement of anti-discrimination laws and narrowing gaps in skills, such pay gaps remain and are likely to continue.

Men and women. Although the pay gap between men and women workers shrank by more than one-third between 1979 and 1998, women have yet to achieve parity with men. Overall, women’s earnings have risen from 63 percent to 76 percent of men’s earnings. While earnings of young women are nearly on par with young men (at about 91¢ on the dollar), older women lag further behind comparably aged men. Women 45 to 54 years old earn just 67 percent of what men earn, and women 55 to 64 years old earn just 66 percent.

The pay gap between men and women can be explained primarily by three factors. Roughly one-third of the pay gap between men and women is due to differences in labor market experience and, to a lesser extent, educational attainment. Women have roughly the same average educational attainment as men, and their test scores are roughly comparable (though women tend to score slightly higher in verbal areas while men do so in math). Differences in courses taken by men and women contribute somewhat to the differences observed between college-educated men and women, but not to those between men and women with high-school or less education. Work experience levels are lower among women, many of whom withdraw temporarily from the labor force to rear children.

Another 28 percent of the gap reflects differences in the occupations and industries in which men and women work and differences in their union status. Women continue to be concentrated in certain occupations (e.g., teaching and clerical work) and industries (e.g., retail trade and services). Some of this concentration, or "segregation," no doubt reflects women’s choices, while some likely reflects barriers they continue to face in gaining entry to male-dominated fields.

More than 40 percent of the pay gap remaining between men and women cannot be explained by differences in the characteristics of female and male workers or the jobs they hold and is often interpreted as discrimination.12 Discrimination can take many forms, such as being hired less frequently in high-wage firms, receiving less training and fewer pro-motions, particularly into the executive suite, and being assigned to lower-paying jobs within the same occupations. For example, in 1998, waiters earned 22 percent more than waitresses. 13

Women workers also face a pension gap. Fewer than 40 percent of all women working in the private sector are covered by a pension, compared with 46 percent of men, and only 32 percent of current female retirees receive a pension, compared with 55 percent of men. The lower earnings of women contribute to lower pensions when they retire. The average pension benefit received by new female retirees is less than half that of men.

White women and minority women. Since 1979, the earnings of white women have risen 16 percent, twice as much as the 8 percent earnings increase of black women. While in 1998 white women’s earnings were roughly 76 percent of white men’s, the earnings of black and Hispanic women were only 65 and 55 percent, respectively, of white men’s.14

White men and minority men. The wages of black men improved dramatically between 1940 and 1990. In 1940, black men earned on average only 40¢ for every dollar earned by white men. By 1990, black men’s wages had climbed to about 75 percent of white men’s, and, by 1998, to 76 percent.

Although the real wages of black men overall have stagnated or even declined since 1975, more-experienced workers benefited disproportionately compared to the newest workers. Black men with 10 or more years of labor market experience continued to enjoy improvements in relative wages in the 1980s, but black men in the lowest experience category lost ground relative to white males with similar experience. Furthermore, the unemployment rate of black men remains twice that of white men, and their labor force participation rate lags behind that of whites. While these rates have improved dramatically with the strong economy in the period 1993 to 1999, the unemployment rate of adult black men is still in the range of 6 to 7 percent and that of black teens in the range of 25 to 30 percent.15

Wage gaps vary among Hispanic, Asian, and white men. Indian and Japanese men earned somewhat more than white males; Mexican, Puerto Rican, and Vietnamese men earned less than two-thirds as much. The primary reason for the continuing earnings inequality between white and nonwhite men is the persisting gap in educational attainment. While the gaps in the quantity and quality of education between native-born whites and minorities, (as measured by test scores), have narrowed somewhat in the past few decades, the demand for skills appears to be rising even more rapidly. Blacks, Hispanics, and other minority groups frequently have fewer years of education and a poorer quality education. This contributes significantly to their lower employment and earnings levels.

Dramatic differences in educational attainment and English language ability across these groups of workers reflect a high concentration of immigrants. Differences in educational attainment and language ability seem to account for much of the wage gap between whites and Asians and especially between whites and Hispanics. Based upon historical experience, the education, and thus the earnings, of the sons and daughters of these immigrants will soon surpass those of their parents.

Other factors contribute to persistent labor force inequality among racial and ethnic groups:

Employer perceptions. Differences employers perceive in the "soft skills" —such as attitude and communication ability—contribute to differences in their willingness to hire youths and minorities.

Racial discrimination. Discrimination by employers, patrons and coworkers—especially against black males—and the "glass ceiling," blocks advancement opportunities for minority men as well as minority women. (See chapter 5, Workplace conditions, for further discussion.)

Limited early work experience. Young blacks have a particularly difficult time transitioning from school to work and thereby lose valuable early work experience. Such experience has proven important to employment stability and wage growth.

Spatial mismatch. Residents of inner-city or rural areas may have limited access to available jobs in other cities and outer suburbs because of transportation limitations and lack of information and contacts in those neighborhoods.

Involvement in crime. Whether their perceptions are based on reality or stereotypes, many employers are unwilling to hire applicants that they suspect may have been involved in criminal activity. These lost opportunities to gain work experience most adversely affect young minorities.

Workers with disabilities and those with no disabilities. As a result of their low employment rates, people with disabilities are more likely to live in poverty than those without disabilities. In 1995, 30 percent of working-age people with disabilities had incomes below the poverty level—three times the poverty rate of working-age Americans without disabilities. Among people with significant disabilities that prevent them from working at all or qualify them to receive Medicare or social security insurance, 36 percent have incomes below the poverty level. The poverty rate is even higher for certain segments of the population of people with disabilities. Of single women with disabilities who have children under six, for example, 73 percent are living in poverty. (See chapter 1, Workforce for more details.)

Even for people with disabilities who have jobs, income levels may be below average due to a combination of lower hourly wages and reduced work hours. People with disabilities who work full time earn only 86 percent as much, on average, as full-time workers without disabilities. Among people working part time, those with disabilities earn only 64 percent as much as those without disabilities. People with disabilities may have lower wages than those without disabilities because they lack the skills and education needed for better-paying jobs. As shown in chapter 1, the educational attainment of people with disabilities is much lower than that of those without disabilities. Another reason for their lower wages may be that many people with disabilities, particularly significant disabilities, get tracked into low-wage jobs or into sheltered employment settings that pay sub-minimum wages and lack opportunities for career advancement or training. These practices continue in spite of evidence that, with appropriate services, accommodation, and support, many of these individuals could compete in the labor market and earn competitive wages.16


Most American workers will continue to enjoy the robust economy projected for the future, with its strong employment growth, stable prices, and increasing family income. Fundamental trends are positive, and while business-cycle fluctuations in employment and growth will undoubtedly occur, they are likely to be minimal.

Workers will continue to benefit from rising productivity, thus supporting continued growth in the purchasing power of American families. The Social Security Administration projects that real earnings will continue to grow at about one percent per year through 2010,17even as employers feel continued pressure to contain labor costs to compete in the global economy.

Technological change—perhaps accelerating in the future with the expansion of the Internet and other rapidly evolving telecommunications technologies— could continue to increase the gap between workers who have high levels of education and skills and those who do not. The increased premium on skills would by itself increase wage inequality, but it will also motivate more people to invest in their skills. If enough people obtain the

higher skill levels required by rapidly changing technologies, wage inequality may continue to shrink. Wage inequality between middle- and low-wage earners may also narrow if lawmakers pass increases in the minimum wage sufficient to stabilize its real value.

The pay gap between men and women will likely continue to narrow as women gain increased labor-market experience and enter into higher-paying occupations. The trend may be slowed, however, by continued discrimination and by "segregation" of women in certain occupations and industries.

Signs of long term progress in narrowing white–black pay gaps are apparent in the educational attainment of the black community including the higher college enrollment rates. Discriminatory behavior also seems to decline in tight labor markets, as employers hire workers whom they might not otherwise consider. Thus, if a tight labor market persists, people with limited education as well as women, minorities, and people with disabilities may gain valuable work experience that will improve their future employability and wages.

Nevertheless, negative influences such as the rising costs of higher education, reduced support for poor families, and economically segregated neighborhoods will continue to pose challenges for America’s poor.

Technological changes, coupled with rising educational attainment, offer opportunities and provide the potential for increased competitive employment for people with disabilities. Thus over time, this will narrow the gap between their average earnings and those of people without disabilities.

However, significant employment barriers remain, particularly for those who need but can not get healthcare coverage when they return to work. The loss of Medicare or Medicaid coverage can prevent individuals with disabilities from maximizing their employment and earning potential.

Any attempt to eradicate employment differences— between men and women, whites and minorities, or people with disabilities and people without disabilities—will have to address the wide range of labor market and social barriers that these groups continue to face.

9 For more information see George J. Borjas, Richard B. Freeman, and Lawrence F. Katz, "How Much Do Immigration and Trade Affect Labor Market Outcomes?," Brookings Papers on Economic Activity, No. 1, 1997, pp. 1-90.

10 Lawrence Katz and David H. Autor, "Changes in the Wage Structure and Earnings Inequality," May 1998, pp. 86-87, prepared as a chapter for Orley Ashenfelter and David Card, editors, Handbook of Labor Economics, Amsterdam, North-Holland, forthcoming.

11 David Card. Falling Union Membership and Rising Wage Inequality: What’s The Connection? Cambridge, MA: National Bureau of Economic Research, Working Paper No. 6520, April 1998.

12 Council of Economic Advisors, "Explaining Trends in the Gender Wage Gap," June 1998, p. 4.

13 U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings, January 1999, p. 215.

14 U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey. There are no publicly reported annual data that are available on the relative earnings of Asian women and men, due to their small sample size in the primary data sets used for these calculations.

15 Harry J. Holzer, "Racial Differences in Labor Market Outcomes Among Men," unpublished, Michigan State University, December 1998 and U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey.

16 Mitchell P. LaPlante, Joe Kennedy, S. Stephen Kaye, and Barbara L. Wenger, Disability Statistics Abstract: Disability and Employment – No. 11, U.S. Department of Education, National Institute on Disability and Rehabilitation, January 1996.

17 1999 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors’ Insurance and Disability Insurance Trust Funds, March 1999.

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