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The wage premium puzzle and the quality of human capital

  • Milton H. Marquis
  • Bharat Trehan
  • Wuttipan Tantivong

The wage premium for high-skilled workers in the United States, measured as the ratio of the 90th-to-10th percentiles from the wage distribution, increased by 20 percent from the 1970s to the late 1980s. A large literature has emerged to explain this phenomenon. A leading explanation is that skill-biased technological change (SBTC) increased the demand for skilled labor relative to unskilled labor. In a calibrated vintage capital model with heterogenous labor, this paper examines whether SBTC is likely to have been a major factor in driving up the wage premium. Our results suggest that the contribution of SBTC is very small, accounting for about 1/20th of the observed increase. By contrast, a gradual and very modest shift in the distribution of human capital across workers can easily account for the large observed increase in wage inequality.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2011-06.

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Date of creation: 2011
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Handle: RePEc:fip:fedfwp:2011-06
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