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Increasing Income Inequality: Productivity, Bargaining and Skill-Upgrading

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Listed author(s):
  • Frederiksen, Anders

    ()

    (Aarhus University)

  • Poulsen, Odile

    ()

    (University of East Anglia)

Abstract

In recent decades most developed countries have experienced an increase in income inequality. In this paper, we use an equilibrium search framework to shed additional light on what is causing an income distribution to change. The major benefit of the model is that it can accommodate shocks to the skill composition in the market, employee bargaining power and productivity. Further, when our model is subjected to skill-upgrading and changes in employee bargaining power, it is capable of predicting the recent changes observed in the Danish income distribution. In addition, the model emphasizes that shocks to the employees’ relative productivity, i.e., skill-biased technological change, are unlikely to have caused the increase in income inequality.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4791.

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Length: 32 pages
Date of creation: Feb 2010
Publication status: published as 'Income Inequality: The Consequences of Skill-Upgrading - When Firms Have Hierarchical Organizational Structures' in Economic Inquiry, 2016, 54 (2), 1224-1239
Handle: RePEc:iza:izadps:dp4791
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Keywords: bargaining power; two-sector search model; income inequality; skill-biased technological change;

Other versions of this item:

Find related papers by JEL classification:
  • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
  • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
  • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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  1. Kevin M. Murphy & Finis Welch, 1992. "The Structure of Wages," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 285-326.
  2. DiNardo, John & Fortin, Nicole M & Lemieux, Thomas, 1996. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," Econometrica, Econometric Society, vol. 64(5), pages 1001-1044, September.
  3. Lawrence F. Katz & Kevin M. Murphy, 1992. "Changes in Relative Wages, 1963–1987: Supply and Demand Factors," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 35-78.
  4. James Albrecht & Susan Vroman, 2002. "A Matching Model with Endogenous Skill Requirements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 283-305, February.
  5. JuanJ. Dolado & Marcel Jansen & JuanF. Jimeno, 2009. "On-the-Job Search in a Matching Model with Heterogeneous Jobs and Workers," Economic Journal, Royal Economic Society, vol. 119(534), pages 200-228, 01.
  6. Christopher A. Pissarides, 1994. "Search Unemployment with On-the-job Search," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 457-475.
  7. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  8. Ann P. Bartel & Nachum Sicherman, 1999. "Technological Change and Wages: An Interindustry Analysis," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 285-325, April.
  9. Gautier, Pieter A, 2002. "Unemployment and Search Externalities in a Model with Heterogeneous Jobs and Workers," Economica, London School of Economics and Political Science, vol. 69(273), pages 21-40, February.
  10. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Rising Wage Inequality: The Role of Composition and Prices," NBER Working Papers 11628, National Bureau of Economic Research, Inc.
  11. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March.
  12. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-1381, September.
  13. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  14. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  15. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-442, June.
  16. Bound, John & Johnson, George, 1992. "Changes in the Structure of Wages in the 1980's: An Evaluation of Alternative Explanations," American Economic Review, American Economic Association, vol. 82(3), pages 371-392, June.
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