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Ben-Porath meets skill-biased technical change: a theoretical analysis of rising inequality

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  • Fatih Guvenen
  • Burhanettin Kuruscu

Abstract

In this paper we present an analytically tractable general equilibrium overlapping-generations model of human capital accumulation, and study its implications for the evolution of the U.S. wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill-biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with the U.S. data including (i) a rise in overall wage inequality in both the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (v) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC, and interpreting the transformation that the U.S. economy has gone through since the 1970s.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 144.

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Date of creation: 2006
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Handle: RePEc:fip:fedmem:144

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References

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  1. Fatih Guvenen, 2006. "Learning your earning: are labor income shocks really very persistent?," Discussion Paper / Institute for Empirical Macroeconomics 145, Federal Reserve Bank of Minneapolis.
  2. Acemoglu, D., 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," Working papers 97-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Rising Wage Inequality: The Role of Composition and Prices," NBER Working Papers 11628, National Bureau of Economic Research, Inc.
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  8. Giovanni L. Violante, 2002. "Technological Acceleration, Skill Transferability, And The Rise In Residual Inequality," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 297-338, February.
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  24. Galor, Oded & Tsiddon, Daniel, 1997. "Technological Progress, Mobility, and Economic Growth," American Economic Review, American Economic Association, vol. 87(3), pages 363-82, June.
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Cited by:
  1. Oleksiy Kryvtsov & Alexander Ueberfeldt, 2007. "Schooling, Inequality and Government Policy," Working Papers 07-12, Bank of Canada.
  2. Favilukis, Jack, 2013. "Inequality, stock market participation, and the equity premium," Journal of Financial Economics, Elsevier, vol. 107(3), pages 740-759.

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