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Investment-specific Technical Change and the Dynamics of Skill Accumulation and Wage Inequality

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  • Hui He
  • Zheng Liu

Abstract

Wage inequality between education groups in the United States has increased substantially since the early 1980s. The relative quantity of college-educated workers has also increased dramatically in the postwar period. This paper presents a unified framework where the dynamics of both skill accumulation and wage inequality arise as an equilibrium outcome driven by measured investment-specific technological change. Working through capital-skill complementarity and endogenous skill accumulation, the model is able to account for much of the observed changes in the relative quantity of skilled workers. The model also does well in replicating the observed rise in wage inequality since the early 1980s. Based on the calibrated model, we examine the quantitative effects of some hypothetical tax-policy reforms on skill formation, inequality, and welfare.

Suggested Citation

  • Hui He & Zheng Liu, 2006. "Investment-specific Technical Change and the Dynamics of Skill Accumulation and Wage Inequality," Emory Economics 0609, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:0609
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