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The wage premium puzzle and the quality of human capital

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Author Info

  • Milton H. Marquis
  • Bharat Trehan
  • Wuttipan Tantivong

Abstract

The wage premium for high-skilled workers in the United States, measured as the ratio of the 90th-to-10th percentiles from the wage distribution, increased by 20 percent from the 1970s to the late 1980s. A large literature has emerged to explain this phenomenon. A leading explanation is that skill-biased technological change (SBTC) increased the demand for skilled labor relative to unskilled labor. In a calibrated vintage capital model with heterogenous labor, this paper examines whether SBTC is likely to have been a major factor in driving up the wage premium. Our results suggest that the contribution of SBTC is very small, accounting for about 1/20th of the observed increase. By contrast, a gradual and very modest shift in the distribution of human capital across workers can easily account for the large observed increase in wage inequality.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2011-06.

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Date of creation: 2011
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Handle: RePEc:fip:fedfwp:2011-06

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Related research

Keywords: Labor supply ; Wages;

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References

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  1. Nidardo, J. & Fortin, N. & Lemieux, T., 1994. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," Papers 93-94-15, California Irvine - School of Social Sciences.
  2. Simon Gilchrist & John C. Williams, 2000. "Putty-Clay and Investment: A Business Cycle Analysis," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 928-960, October.
  3. Milton H. Marquis & Bharat Trehan, 2007. "Productivity shocks in a model with vintage capital and heterogeneous labor," Working Paper Series 2007-06, Federal Reserve Bank of San Francisco.
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Cited by:
  1. Maren M. Michaelsen, 2011. "The Hidden Increase in Wage Inequality: Skill-biased and Ability-biased Technological Change," Ruhr Economic Papers 0262, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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