Assessing the Consequences of Declining Unionization and Public-Sector Employment: A Density-Function Decomposition of Rising Inequality From 1983 to 2005

This study defines four sectors of labor markets based on union membership and public-sector employment. Using the current population surveys from 1983 to 2005, the authors decompose the growth of wage inequality into compositional changes, group-specific mean changes, and group-specific variance changes. This approach allows one to more precisely identify and assess the immediate intervening processes associated with rising wage inequality. The findings suggest that, although the increase of the demand for the skilled workers does play a significant role, the recent increase in wage dispersion cannot be fully explained by skill-biased technological change. This study’s analysis instead indicates that the two main sources of increasing inequality include the “nonunion private sectorization” of all sectors and the reduction in the sizes of the institutionally protected market sectors. Rising inequality seems to be because of the dismantling of the institutions that formerly insulated a large proportion of workers from direct engagement with market forces as the immediate wage-setting mechanism.