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The Market for "Rough Diamonds": Information, Finance and Wage Inequality

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  • Theodore Koutmeridis

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    (University of St Andrews)

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    Abstract

    During the past four decades both between and within group wage inequality increased significantly in the US. I provide a microfounded justification for this pattern, by introducing private employer learning in a model of signaling with credit constraints. In particular, I show that when financial constraints relax, talented individuals can acquire education and leave the uneducated pool, this decreases unskilled-inexperienced wages and boosts wage inequality. This explanation is consistent with US data from 1970 to 1997, indicating that the rise of the skill and the experience premium coincides with a fall in unskilled-inexperienced wages, while at the same time skilled or experienced wages do not change much. The model accounts for: (i) the increase in the skill premium despite the growing supply of skills; (ii) the understudied aspect of rising inequality related to the increase in the experience premium; (iii) the sharp growth of the skill premium for inexperienced workers and its moderate expansion for the experienced ones; (iv) the puzzling coexistence of increasing experience premium within the group of unskilled workers and its stable pattern among the skilled ones. The results hold under various robustness checks and provide some interesting policy implications about the potential conflict between inequality of opportunity and substantial economic inequality, as well as the role of minimum wage policy in determining the equilibrium wage inequality.

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    Bibliographic Info

    Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201307.

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    Date of creation: 12 Sep 2013
    Date of revision: 14 Oct 2013
    Handle: RePEc:san:cdmawp:1307

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    Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
    Phone: 01334 462420
    Fax: 01334 462444
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    Web page: http://www.st-andrews.ac.uk/cdma
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    Keywords: wage inequality; experience premium; skill premium; employer learning; signaling; financial constraints; minimum wages;

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