lbo-talk-digest V1 #499

Heather Boushey HBoushey at
Thu Oct 15 07:45:59 PDT 1998

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>Date: Wed, 14 Oct 1998 15:48:05 -0400
From: Doug Henwood <dhenwood at> Subject: Re: unobserved skill

alec ramsdell wrote:

>Galbraith cites a study by Chinhui Juhn, Kevin Murphy, and Brooks Pierce
>that separates "three distinct patterns of rising inequality, of
>approximately equal importance." The third is "unobserved skill," a
>category in the discussion of income inequality, originating in the late
>60s. Can anyone explain this category a little? Galbraith calls it the
>"mysterious third factor," that it's "a residual unattributable to any
>measureable characteristic." Is anyone familiar with the study
>Galbraith cites? If unobserved skill isn't amenable to measurement (of
>what kind, I guess is the quesiton), what kind of explanatory or
>analytic power does it have?

That's the classic econometrician's dodge - when you've got something you can't explain with your regressions, attribute it to some "unobserved" factor. In productivity work, it's always "technological change"; in the labor markets, it's "unobserved skill"; in finance, it's "noise." Josh Mason told me that someone - perhaps Will Milberg, but he wasn't sure - said at a New School/CEPA seminar last year that hegemony consists in being able to name the residual.


I would like to add to (possibly) Will Milberg's excellent characterization of the naming of "unobservable skill" which in the Juhn, Murphy, and Pierce piece, seems to be the case. They identify an "enormous increase in wage inequality among male workers" and they attribute it to "increases in the premia on both unobserved and observed (such as education) dimensions of skill, with the majority of the increase over the period due to the unobserved component" (p. 411). Essentially, what they are saying is that they don't know why the wage premium for college educated workers rose between 1963 and 1989. Much of their problem is that their economic paradigm does not allow them to look beyond human capital, or other "microeconomic" measures, to understand wage determination. In their basic model, wages are determined by the worker's marginal product. Thus, if the "observed" skills can't explain wages, then "unobserved" must. Of course, another way of approaching this question, which is what Galbraith does, is to look to structural factors and macroeconomic fluctuations..

It is important to note that this line of reasoning rears its ugly head most often in the study of wage differential between men and women and between African American and white workers. The literature on racial inequality has recently been inundated with papers discussing the lack in "unobserved skills" held by African American workers. Since we can't explain why African Americans earn less (unless we turn to a theory of racism in labor markets), we must see it as the fault of the African American worker's themselves (i.e., "their" educational credentials aren't "worth" as much as white workers, etc.)

Heather Boushey Research Department NYC Housing Authority 250 Broadway, Room 711 New York, NY 10007 (p) 212-306-3372; (f) 212-306-6485 hboushey at

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