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Investment-specific technological change, skill accumulation, and wage inequality

Listed author(s):
  • Hui He
  • Zheng Liu

Wage inequality between education groups in the United States has increased substantially since the early 1980s. The relative number 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 equipment-skill complementarity and endogenous skill accumulation, the model does well in capturing the steady growth in the relative quantity of skilled labor during the postwar period and the substantial rise in wage inequality after the early 1980s. Based on the calibrated model, we examine the quantitative effects of some hypothetical tax-policy reforms on skill accumulation, wage inequality, and welfare.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 644.

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Date of creation: 2007
Handle: RePEc:fip:fedmwp:644
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  4. Daron Acemoglu, 2000. "Technical Change, Inequality, and the Labor Market," NBER Working Papers 7800, National Bureau of Economic Research, Inc.
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  9. Andreas Hornstein & Per Krusell, 2003. "Implications of the capital-embodiment revolution for directed R&D and wage inequality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 25-50.
  10. William Blankenau, 1999. "A Welfare Analysis of Policy Responses to the Skilled Wage Premium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 820-849, October.
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