Globalization and Wage Polarization

The US labour market has experienced a remarkable polarization in the 1980s and 1990s. At the same time, the US faced a fast technological catch-up as European countries and especially Japan drastically improved their global innovation and patenting activity. Is foreign technological convergence an important source of the recent evolution of the US wage and employment structure? To answer these questions, we set up a Schumpeterian model of endogenous technological progress with two asymmetric countries, heterogeneous workers, endogenous skill formation and occupational choice. Calibrating the model to match key facts of the US economy, we find that foreign technological catching-up observed between the late 1970s and early 1990s reproduces a non-negligible part of US wage polarization. Moreover, the model delivers predictions on the US wealth to income ratio consistent with empirical evidence in that period.