Skills and the evolution of wage inequality

• Mean employed cognitive skills have changed little in education-gender groups.
• Mean employed cognitive skills increased due to labour force composition changes.
• Returns to cognitive skills increased much more rapidly for higher skill levels.
• Skill price changes account for 60% of the growth in the college wage premium.
• Skills account for a small but growing fraction of residual wage inequality.

This paper studies wage inequality in the United States between 1980 and 2010 in a framework that accounts for changes in the employment of physical and cognitive skills and their returns. I find that the secular rise in the employment of cognitive skills is largely accounted for by labour force composition changes in shares of gender–education groups rather than changes that occur within these groups. Average employed skills differ greatly across groups, but over time their average employed cognitive skills have remained approximately constant. Returns to cognitive skills increased very sharply for high skill levels, more gradually around mean levels, and decreased at low levels. Returns to physical skills generally declined. These trends account for approximately 63% of the increase in the college wage premium, with changes in returns to cognitive skills playing a dominant role.