SOURCE: Federal Reserve Bank of Richmond

August 30, 2005 09:10 ET

Richmond Fed's Latest Economic Quarterly Features New Thoughts on Wage Inequality and Unemployment

RICHMOND, VA -- (MARKET WIRE) -- August 30, 2005 -- What's Driving Wage Inequality? Wage inequality has increased sharply in the United States since the mid-1970s. Some have argued that globalization -- in particular, increased international trade and immigration -- is primarily responsible for changes in the wage distribution. However, Senior Vice President and Director of Research, John Weinberg and Region Focus Editor, Aaron Steelman, argue that the main cause is skill-biased technical change. Workers with relatively high skill levels have experienced more rapid growth in wages than less-skilled workers, some of whom have seen an actual decline in their real wages. Although technical change likely has increased wage inequality, it also has greatly enhanced productivity and living standards in the United States. This article first appeared in the Bank's 2004 Annual Report.

In a related article:

Unemployment and Vacancy Fluctuations in the Matching Model: Inspecting the Mechanism. Andreas Hornstein (Richmond Fed economist and vice president), Per Krusell (economics professor, University of Rochester, and Richmond Fed visiting scholar), and Giovanni L. Violante (assistant professor of economics, New York University) review recent research on a widely used search model of unemployment. While the search model accounts for the qualitative features of unemployment and job-finding rates over the business cycle, it is unable to account for the magnitudes of these fluctuations. The authors conclude that when the basic search model is calibrated to generate labor market volatility of a magnitude comparable with the data, it has sharp counterfactual implications for the size and the cyclicality of the wage share and for the elasticity of unemployment to welfare benefits.

Also in the Summer 2005 issue:

Oil Prices and Consumer Spending. Richmond Fed Economist Yash P. Mehra and Research Associate Jon D. Petersen present evidence of a nonlinear relation between oil price changes and consumer spending. They assert that oil price increases have a negative effect on spending whereas oil price declines have no effect: The estimated negative effect of an oil price increase on spending is larger if one focuses on oil price increases occurring after a period of stable oil prices (net oil price increases) or if spending includes durables, the latter suggesting the possible negative influence of energy prices on the purchase of big-ticket consumption goods. Furthermore, the estimated oil price coefficients in the consumption equation do not show parameter instability during the 1980s when oil prices moved widely for the first time in both directions.

The Economic Quarterly contains economic analysis pertinent to Federal Reserve monetary and banking policy. For free copies, contact the Federal Reserve Bank of Richmond's Public Affairs office at (804) 697-7982 or visit

Contact Information

  • Contact:
    John Weinberg
    Director of Research
    Federal Reserve Bank of Richmond

    Aaron Steelman
    Research/Publications Unit