Fixed Costs, Task Variety, and Skill Flexibility: A Simple Unified Theory of Below- and Within-top Inequality
Dew-Becker and Gordon (2005) document new findings regarding income inequality in the U.S. over the period of 1966-2001 based on Internal Revenue Service (IRS) micro data. In particular, they found that the mean real income has grown faster than the median real income because half of the income gains in the U.S. went to the top 10 percent of the income distribution. Although one-half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile (below-top inequality), the other half is due to increased skewness within the top 10 percent (within-top inequality). This paper develops a simple model that provides a unified explanation of these facts as they pertain to both below- and within-top inequality. We show that under differences in the flexibility of skills--modeled according to the work of Mitchell (2005) as differences in the setup costs required to combine a given number of intermediate goods/tasks--an increase in task variety due to a decrease in fixed costs of entry can be a source of these income changes. The decrease in fixed costs of entry may be caused by technological change and/or entry deregulation. Furthermore, we show that trade, immigration, and labor institutions can also be catalysts for these types of income changes as a result of their respective effects on task variety. Therefore, even if technological change is similar everywhere, even slight cross-country differences in other factors can cause cross-country differences in the top skewness.
|Date of creation:||Feb 2014|
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