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Fixed Costs, Task Variety, and Skill Flexibility: A Simple Unified Theory of Below- and Within-top Inequality

  • Manoj Atolia
  • Yoshinori Kurokawa

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.

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File URL: http://www.econ.tsukuba.ac.jp/RePEc/2014-001.pdf
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Paper provided by Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba in its series Tsukuba Economics Working Papers with number 2014-001.

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Date of creation: Feb 2014
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Handle: RePEc:tsu:tewpjp:2014-001
Contact details of provider: Postal: 1-1-1 Tennodai, Tsukuba, Ibaraki 305-8571
Web page: http://www.econ.tsukuba.ac.jp/

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  1. Thomas I. Palley, 2008. "Financialization: What it is and Why it Matters," IMK Working Paper 04-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  2. Ian Dew-Becker, 2008. "How Much Sunlight Does it Take to Disinfect a Boardroom? A Short History of Executive Compensation Regulation," CESifo Working Paper Series 2379, CESifo Group Munich.
  3. Maarten Goos & Alan Manning, 2007. "Lousy and Lovely Jobs: The Rising Polarization of Work in Britain," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 118-133, February.
  4. Frederiksen, Anders & Kato, Takao, 2011. "Human Capital and Career Success: Evidence from Linked Employer-Employee Data," IZA Discussion Papers 5764, Institute for the Study of Labor (IZA).
  5. William Milberg, Deborah Winkler, 2009. "WP 2009-5 Financialization and the Dynamics of Offshoring in the U.S," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2009-5, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  6. Edward P. Lazear, 2010. "Leadership: A Personnel Economics Approach," NBER Working Papers 15918, National Bureau of Economic Research, Inc.
  7. Hein, Eckhard, 2011. "Distribution, ‘Financialisation’ and the Financial and Economic Crisis – Implications for Post-crisis Economic Policies," MPRA Paper 31180, University Library of Munich, Germany.
  8. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 67-150.
  9. Roine, Jesper & Waldenström, Daniel, 2006. "The Evolution of Top Incomes in an Egalitarian Society: Sweden, 1903–2004," SSE/EFI Working Paper Series in Economics and Finance 625, Stockholm School of Economics.
  10. Emily Blanchard & Gerald Willmann, 2013. "Trade, Education, and The Shrinking Middle Class," Kiel Working Papers 1831, Kiel Institute for the World Economy.
  11. Kurokawa, Yoshinori, 2008. "Fixed Cost, Number of Firms, and Skill Premium: An Alternative Source for Rising Wage Inequality," MPRA Paper 14014, University Library of Munich, Germany.
  12. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-97, December.
  13. Matthew F. Mitchell, 2005. "Specialization And The Skill Premium In The 20th Century," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 935-955, 08.
  14. Dew-Becker, Ian & Gordon, Robert J, 2008. "Controversies about the Rise in American Inequality: A Survey," CEPR Discussion Papers 6817, C.E.P.R. Discussion Papers.
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