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Technological Acceleration, Skill Transferability and the Rise in Residual Inequality

  • Violante, Giovanni L

This Paper provides an interpretation for the recent rise in residual wage inequality which is consistent with the empirical observation that a sizeable part of this increase has a transitory nature, a feature that eludes standard models based on ex-ante heterogeneity in ability. In the model an acceleration in the rate of quality-improvement of equipment, like the one observed from the early 70's, reduces workers’ capacity to transfer skills from old to new machines. This force generates a rise in the cross-sectional variance of skills, and therefore of wages. Through calibration, the Paper shows that this mechanism can account for 30% of the surge in residual inequality in the US economy (or for most of its transitory component). Two key implications of the theory - faster within job wage growth and larger wage losses upon displacement - find empirical support in the data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2765.

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Date of creation: May 2001
Date of revision:
Handle: RePEc:cpr:ceprdp:2765
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