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The Effect of Product Demand on Inequality: Evidence from the US and the UK


  • Leonardi, Marco

    () (University of Milan)


This paper examines the relationship between product demand and the pattern of rising skill premia and rising employment of skilled workers in the US and the UK since the 1980s. If more skilled workers demand more skill-intensive goods, then an increase in relative skill supply will also induce a shift in relative skill demand. This channel reduces the need to rely on technology and trade to explain the patterns in the data. This paper shows that in the US more educated and richer workers demand more low skill-intensive services (such as cleaning and personal services) but also more skill-intensive services (such as education and professional services). The parametrization of a simple model suggests that this induced demand shift can explain around 7% of the total relative demand shift in the US between 1984 and 2002. Similar results are provided for the UK.

Suggested Citation

  • Leonardi, Marco, 2010. "The Effect of Product Demand on Inequality: Evidence from the US and the UK," IZA Discussion Papers 5011, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp5011

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    References listed on IDEAS

    1. Maarten Goos & Alan Manning & Anna Salomons, 2010. "Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions," CEP Discussion Papers dp1026, Centre for Economic Performance, LSE.
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    27. repec:rim:rimwps:34-08 is not listed on IDEAS
    28. Leonardi, Marco, 2002. "Product Demand Shifts and Wage Inequality," Royal Economic Society Annual Conference 2002 125, Royal Economic Society.
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    Cited by:

    1. Santra, Sattwik, 2014. "Non-homothetic preferences: Explaining unidirectional movements in wage differentials," Journal of Development Economics, Elsevier, vol. 109(C), pages 87-97.

    More about this item


    wage inequality; product demand; income elasticity;

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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