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Understanding the Evolution of the U.S. Wage Distribution: A Theoretical Analysis

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  • Fatih Guvenen
  • Burhanettin Kuruscu

Abstract

In this paper we present an analytically tractable overlapping generations model of human capital accumulation, and study its implications for the evolution of the U.S. wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill-biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with several features of the U.S. data including (i) a rise in overall wage inequality both in the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) a rise in within-group inequality, (v) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (vi) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC, and interpreting the transformation that the U.S. economy has gone through since the 1970's.

Suggested Citation

  • Fatih Guvenen & Burhanettin Kuruscu, 2007. "Understanding the Evolution of the U.S. Wage Distribution: A Theoretical Analysis," NBER Working Papers 13096, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13096
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    References listed on IDEAS

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    Cited by:

    1. Magnac, Thierry & Pistolesi, Nicolas & Roux, Sébastien, 2013. "Post schooling human capital investments and the life cycle variance of earnings," TSE Working Papers 13-380, Toulouse School of Economics (TSE).
    2. Fatih Guvenen & Burhanettin Kuruscu, 2010. "A Quantitative Analysis of the Evolution of the U.S. Wage Distribution, 1970-2000," NBER Chapters,in: NBER Macroeconomics Annual 2009, Volume 24, pages 227-276 National Bureau of Economic Research, Inc.
    3. Anagnostopoulos, Alexis & Atesagaoglu, Orhan Erem & Carceles-Poveda, Eva, 2013. "Skill-biased technological change and homeownership," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 3012-3033.
    4. repec:esx:essedp:754 is not listed on IDEAS
    5. Wang, T & Wright, GC, 2014. "Techonolgical Change and the Income Distribution: Theory and Some Evidence," Economics Discussion Papers 12226, University of Essex, Department of Economics.
    6. Andrea Canidio, 2012. "The Determinants of Long-Run Inequality," CEU Working Papers 2012_10, Department of Economics, Central European University, revised 20 Mar 2012.
    7. Renato Gomes & Jean-Marie Lozachmeur & Alessandro Pavan, 2014. "Differential Taxation and Occupational Choice," Discussion Papers 1577, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. Pierre Monnin, 2014. "Inflation and Income Inequality in Developed Economies," Working Papers 1401, Council on Economic Policies.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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