Introduction and overview

Changes in the labor markets of the developed countries since the 1970s have been the subject of extensive empirical analysis (Murphy and Welch 1989; Freeman 1993; Gregory and Vella 1993; Katz, Loveman, and Blanchflower 1993; Freeman and Katz, 1994). The principal stylized facts to emerge from this analysis are that (1) real wage inequality has increased in most Organization for Economic Cooperation and Development (OECD) member countries (the few exceptions including Japan), (2) this trend has been strongest in the US in the 1980s and weaker in those countries where wage determination is more centralized, and (3) the rate of unemployment has risen more where the trend toward wage dispersion has been weakest. Numerous explanations have been advanced for the trend in the US. Those that emphasize labor supply include that growth in the supply of skilled workers slowed in the 1980s (Katz, Loveman, and Blanchflower 1993) and that immigration of unskilled workers has accelerated (Borjas, Freeman, and Katz 1991). Those emphasizing labor demand argue that technological change has been unskilled labor–saving (Mincer 1991; Bound and Johnson 1992) and that an expansion in imports that are intensive in unskilled labor has shifted the product composition of domestic output in ways that foster growth in the demand for skilled rather than unskilled labor (Murphy and Welch 1991; Wood 1991a, b 1994; Learner 1993).