Blau and Kahn.

Using microdata from the 1994-5 International Adult Literacy Survey, Blau and Kahn examine the role of cognitive ability in explaining higher wage inequality in the United States than in other countries. They find that the greater dispersion of cognitive test scores in the United States does

play a part in explaining higher U.S. wage inequality, but that higher labor market "prices" (that is, returns to measured human capital and cognitive performance) and residual inequality also are important for both men and women. Blau and Kahn find that, on average, "prices" are quantitatively much more important than differences in the distribution of test scores. Internationally, collective bargaining coverage turns out to be significantly and negatively related to wage differentials and significantly and positively related to employment differentials across skill groups. This suggests that unions lower wage differentials, causing a reduction in employment among the group whose wages are raised the most. The authors a lso find that a group's net labor supply (supply minus demand) is significantly negatively related to its relative wage but is not related to its relative employment level. Blau and Kahn conclude that both institutions and market forces affect labor market outcomes.