Wage Inequality and the Rise in Labor Force Exit: The Case of US Prime-Age Men 
Data indicate that more frequent labor force exit among men without a four-year college degree has been driving the decline in the US prime-age (25 to 54) men’s labor force participation rate over the last 40 years. At the same time, non-college men’s earnings measured as a share of the average earnings of all prime-age workers have fallen by more than 30 percent since 1980. In light of these parallel trends, this paper investigates whether prime-age noncollege men are more inclined to leave the labor force when their expected earnings fall relative to the earnings of other workers in their labor market. The empirical model takes into account that a job not only provides economic security but also affirms a worker’s social status, which is tied to their position relative to their age-range peers. The sample consists of state-occupation-level panel data on labor force exit rates, occupation earnings, and job loss risk matched with information on the state-level earnings distribution and a set of state socioeconomic controls over the period 1980 through 2019.
Key Findings
- Labor force exit rates decline with a worker group’s expected earnings but increase with their reference earnings, defined as the average earnings in a state across all prime-age workers. Compared with a 10 percent increase in expected earnings, a 10 percent increase in reference earnings has the same sized but opposite effect on the labor force exit rate, suggesting that workers discount their own expected earnings by their peers’ earnings. The discounting effect is consistently estimated under both the OLS and 2SLS methods.
- From 1980 through 2019, non-college-educated men’s relative earnings declined 30 percent on average across occupations and states. A fall in real earnings and a rise in reference earnings each contributed to half of the decline.
- The decline in relative earnings is associated with a 0.49 percentage point increase in the exit rate, accounting for 44 percent of the total growth in the exit rate among non-college men over the 1980–2019 period.
- Changes in real earnings alone account for only 18 percent of the increase in the exit rate.
- The relationship between labor force exit rate and relative earnings is strongest among non-Hispanic White men and younger men.
- Conditional on the state median earnings not increasing or decreasing, non-college-educated men are more likely to leave the labor force when the top earners in a state make disproportionately more than the other workers, offering additional evidence that earnings inequity may undermine men’s labor force participation incentives.
Implications
The evidence from this study shows that the widening earnings gap between highly and less skilled workers over the last four decades is closely connected with the decreasing labor supply of prime-age men. The cost of skill-biased economic growth may exceed our current understanding if it has weakened the labor market attachment of less skilled men. Because it can change the aggregate labor supply, wage inequality carries macroeconomic implications that extend beyond the well-being of individual workers.
Abstract
This article offers the first empirical evidence that labor force exit rates rise when workers’ relative earnings fall. The model takes into account that a job not only provides economic security but also affirms a worker’s social status, which is tied to their relative position in the labor market. Based on the results, the decline in relative earnings for non-college prime-age men over the last four decades is estimated to have raised their labor force exit propensity by 0.49 percentage point, accounting for 44 percent of the total growth in their labor force exit rate during this period.