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Wage inequality, segregation by skill and the price of capital in an assignment model

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  • Gavilan, Angel

Abstract

Some pieces of empirical evidence suggest that in the U.S., from the 1970s to the 1990s, (i) wage inequality between-plants rose much more than wage inequality within-plants and (ii) there was an increase in the segregation of workers by skill into separate plants. This paper presents a frictionless assignment model in which these two features can be explained simultaneously as the result of the decline in the relative price of capital. Additional implications of the model regarding the skill premium and the dispersion in labor productivity across plants are also consistent with the empirical evidence. The model permits to consider changes in the skill distribution too. Combining these changes with falling capital prices provides a more comprehensive view of the overall trend of wage inequality and of workers' segregation by skill in the data, and it helps explaining some episodes of decreasing wage inequality.

Suggested Citation

  • Gavilan, Angel, 2012. "Wage inequality, segregation by skill and the price of capital in an assignment model," European Economic Review, Elsevier, vol. 56(1), pages 116-137.
    • Handle: RePEc:eee:eecrev:v:56:y:2012:i:1:p:116-137
    DOI: 10.1016/j.euroecorev.2011.05.005
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    3. Zhou Kit, 2023. "Choosing Sides in a Two-Sided Matching Market," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 23(2), pages 781-807, June.

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    More about this item

    Keywords

    Wage inequality; Segregation by skill; Assignment model; Price of capital;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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