Low skill wages and mismeasured inflation

ABSTRACT

The current literature presents evidence that the real wage of male workers at the 10th percentile of the wage distribution has fallen since 1970. Yet, contributions within this literature deflate nominal wages using a mismeasured deflator. Another strand of literature documents that the mismeasurement of the deflator is sizable, with recent estimates exceeding0.6 percentage points per year. In this paper, I adjust the deflator and reestimate the implied evolution of male low skill wages. This simple exercise implies that male low skill wages were about 15 log-points higher in 2013 than in 1970.

KEYWORDS:

• Low skill wages
• deflator
• missing growth
• mismeasured inflation

JEL CLASSIFICATION:

• E31
• J31

Acknowledgment

I thank the helpful comments and suggestions of Alper Çenesiz, Pedro Gil, and Filipe Grilo. I am also deeply grateful to Peter Klenow for providing me the time-series of missing growth.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ In the model of Aghion et al. (2017), output has a CES structure, $Y={\left(\underset{0}{\overset{N}{\int }}{\left[q(j)y(j)\right]}^{\frac{\sigma }{\sigma -1}}dj\right)}^{\frac{\sigma }{\sigma -1}}$. $N$ is the number of intermediate varieties; $y(j)$ is the output of intermediate variety $j$, which is produced with quality $q(j)$.

² As Aghion et al. (2017), I choose $\sigma =3$ and $\sigma =5$ to cover the interquartile range of the estimates of the elasticity of substitution of Hottman, Redding, and Weinstein (2016).

Additional information

Funding

Financial support by the Fundação para a Ciência e a Tecnologia is gratefully acknowledged [Projects: POCI-01-0145-FEDER- 006890 and IF/01569/2012/CP0155/CT0001].