Wage dispersion, returns to skill, and black-white wage differentials

During the 1980s wage differentials between different age and education groups expanded rapidly. Wage dispersion among individuals with the same age and education also rose. A simple explanation for both sets of facts is that earnings vary with a one-dimensional index of skill and that the relative return to higher levels of skill rose over the decade. We explore a simple method for estimating and testing such a ‘single-index’ model of wages. Our approach integrates three aspects of skill: age, education, and unobserved ability. We find that a one-dimensional skill model provides a reasonably accurate, although oversimplified, description of changes in the structure of wages for white men and women between 1979 and 1989. We then use the estimated models for white women and white men to interpret recent changes in the relative wages of African American workers.