The Collapse of Low-skill Wages
No recent development in the American labor market has been more dramatic and troubling than the
collapse in the buying power of workers’ paychecks. This drop in the value of wages coincided with a sharp increase in earnings inequality. Perhaps
the most highly publicized characteristic of recent earnings trends has been the widening gap
between highly educated and poorly educated workers. Although supply-side changes appear to provide a reasonable explanation for the modest wage
growth experienced by the most well-educated men in the 1980s, this collapse at the bottom of
the earnings ladder is almost universally attributed to downward shifts in the demand for low-skill
workers. According to this view, it was the growing mismatch between the skills demanded by
firms and those supplied by the workforce that was mainly responsible for reducing wages among
the low-skilled.
This paper assesses the empirical support for the skill mismatch story: Has there, in fact, been a strong shift in demand away from low-skill workers? Does the
timing of employment shifts by skill group across industries match trends in computerization‘?
Have there been observable declines in low-wage employment shares and substantial increases in
low-skill joblessness, as the neoclassical model would predict if there is skill mismatch? The author finds that
the answer to each of these questions is no, and concludes that it is necessary to look beyond
supply and demand shifts to explain the wage collapse.