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A Quantitative Analysis of the Evolution of the U.S. Wage Distribution, 1970-2000

In: NBER Macroeconomics Annual 2009, Volume 24

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  • Fatih Guvenen
  • Burhanettin Kuruscu

Abstract

In this paper, we construct a parsimonious overlapping-generations model of human capital accumulation and study its quantitative implications for the evolution of the U.S. wage distribution from 1970 to 2000. A key feature of the model is that individuals differ in their ability to accumulate human capital, which is the main source of wage inequality in this model. We examine the response of this model to skill-biased technical change (SBTC), which is modeled as an increase in the trend growth rate of the price of human capital starting in the early 1970s. The model displays behavior that is consistent with several important trends observed in the US data, including the rise in overall wage inequality; the fall and subsequent rise in the college premium, as well as the fact that this behavior was most pronounced for younger workers; the rise in within-group inequality; the stagnation in median wage growth; and the small rise in consumption inequality despite the large rise in wage inequality. We consider different scenarios regarding how individuals' expectations evolve during SBTC. Specifically, we study the case where individuals immediately realize the advent of SBTC (perfect foresight), and the case where they initially underestimate the future growth of the price of human capital (pessimistic priors), but learn the truth in a Bayesian fashion over time. Lack of perfect foresight appears to have little effect on the main results of the paper. Overall, the model shows promise for explaining a diverse set of wage distribution trends observed since the 1970s in a unifying human capital framework.
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  • Fatih Guvenen & Burhanettin Kuruscu, 2010. "A Quantitative Analysis of the Evolution of the U.S. Wage Distribution, 1970-2000," NBER Chapters,in: NBER Macroeconomics Annual 2009, Volume 24, pages 227-276 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:11798
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    2. Allard, Julien & Catenaro, Marco & Vidal, Jean-Pierre & Wolswijk, Guido, 2013. "Central bank communication on fiscal policy," European Journal of Political Economy, Elsevier, pages 1-14.
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    5. Alexander Ludwig & Thomas Schelkle & Edgar Vogel, 2012. "Demographic Change, Human Capital and Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 94-107, January.
    6. Anagnostopoulos, Alexis & Atesagaoglu, Orhan Erem & Carceles-Poveda, Eva, 2013. "Skill-biased technological change and homeownership," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 3012-3033.
    7. Julie L. Hotchkiss & Menbere Shiferaw, 2011. "Decomposing the education wage gap: everything but the kitchen sink," Review, Federal Reserve Bank of St. Louis, issue July, pages 243-272.
    8. Eberhard, Juan, 2012. "Immigration, Human Capital and the Welfare of Natives," MPRA Paper 37844, University Library of Munich, Germany.
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    10. Vogel, Edgar & Ludwig, Alexander & Börsch-Supan, Axel, 2014. "Aging and pension reform: Extending the retirement age and human capital formation," SAFE Working Paper Series 82, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    11. Fatih Guvenen & Michelle Rendall, 2015. "Women's Emancipation through Education: A Macroeconomic Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 931-956, October.
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    13. Vogel, Edgar & Ludwig, Alexander & Börsch-Supan, Axel, 2017. "Aging and pension reform: extending the retirement age and human capital formation," Journal of Pension Economics and Finance, Cambridge University Press, pages 81-107.
    14. Audra J. Bowlus & Chris Robinson, 2012. "Human Capital Prices, Productivity, and Growth," American Economic Review, American Economic Association, pages 3483-3515.
    15. Lustig, Hanno & Syverson, Chad & Van Nieuwerburgh, Stijn, 2011. "Technological change and the growing inequality in managerial compensation," Journal of Financial Economics, Elsevier, vol. 99(3), pages 601-627, March.
    16. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
    17. Audra J. Bowlus & Chris Robinson, 2010. "Human Capital Prices, Productivity and Growth," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20104, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    18. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2010. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 681-722, August.
    19. Braz Camargo & Todd Stinebrickner & Ralph Stinebrickner, 2007. "Evidence about the Potential Role for Affirmative Action in Higher Education," NBER Working Papers 13342, National Bureau of Economic Research, Inc.
    20. Audra J. Bowlus & Chris Robinson, 2012. "Human Capital Prices, Productivity, and Growth," American Economic Review, American Economic Association, pages 3483-3515.
    21. Michelle Rendall & Fatih Guvenen, 2009. "Emancipation through Education," 2009 Meeting Papers 70, Society for Economic Dynamics.
    22. Hyeok Jeong & Yong Kim & Iourii Manovskii, 2015. "The Price of Experience," American Economic Review, American Economic Association, pages 784-815.
    23. Mazzonna, Fabrizio, 2014. "The long-lasting effects of family background: A European cross-country comparison," Economics of Education Review, Elsevier, pages 25-42.
    24. Keller, Elisa, 2014. "The slowdown in American educational attainment," Journal of Economic Dynamics and Control, Elsevier, pages 252-270.
    25. Hyeok Jeong & Yong Kim & Iourii Manovskii, 2015. "The Price of Experience," American Economic Review, American Economic Association, pages 784-815.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • 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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