The rich get richer, and the poor get poorer. Like many adages, this one is not always true, but recently it has been. Many studies have documented that the earnings gap between workers with high skills and workers with low skills has increased over the past two decades.

Table I presents data on the average earnings of college graduates and of high school graduates without any additional education. These data show the increase in the financial reward from education. In 1980, a man on average earned 44 percent more with a college degree than without one; by 2 003, this figure had risen to 82 percent. For a woman, the reward for attending college rose from a 35 percent increase in earnings to a 71 percent increase. The incentive to stay in school is as great today as it has ever been.

TABLE 1 Average Annual Earnings by Educational Attainment

Why has the gap in earnings between skilled and unskilled workers widened in recent years? No one knows for sure, but economists have proposed two hypotheses to explain this trend. Both hypotheses suggest that the demand for skilled labor has risen over time relative to the demand for unskilled labor. The shift in demand has led to a corresponding change in wages, which in turn has led to greater inequality.

The first hypothesis is that international trade has altered the relative demand for skilled and unskilled labor. In recent years, the amount of trade with other countries has increased substantially. As a percentage of total U.S. production of goods and services, imports have risen fro,n 5 percent in 1970 to 16 percent in 2003, and exports have risen from 5 percent in 1970 to 10 percent in 2003. Because unskilled labor is plentiful and cheap in many foreign countries, the United States tends to import goods/ produced with unskilled labor and export goods produced with skilled labor. Thus, when international tra’de expands, the domestic demand for skilled labor rises, and the domestic demand for unskilled labor falls.

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