Skills and Economic Inequality Across Race and Ethnicity in the United States: New Evidence on Wage Discrimination Using PIAAC

Abstract

Using skill and earnings data from the OECD’s newly released Programme for the International Assessment of Adult Competencies (PIAAC) and decomposition methodology from literature on economic distributions across countries, this research provides new evidence about the limited extent to which levels of and rates of return to skills explain unequal wage distributions in subgroups defined by race and ethnicity in the United States. The specific importance of PIAAC skill levels and of rates of return to skill varies substantially between racial and ethnic minorities relative to Whites and across the upper and lower parts of the wage distribution, while unobservables remain critical. These findings about differential characteristics of wage spreads are in contrast to relatively high correlations between the means of wage distributions and the more comprehensively defined skill measures observed in PIAAC (in comparison to those that have been examined in past literature), and are robust to the inclusion of other observable human capital and socioeconomic determinants. Results have implications for understanding how formal and informal institutions, discrimination, and labor market compensation practices may translate differentially across racial and ethnic groups and into observed variation in earnings.