Turbulence, Heterogeneity, and Wage Earnings Inequality

There has been a well-documented increase in wage earnings inequality in the last two decades both in the United States as well as in other OECD economies. Moreover, this increase occurred not only across groups, but also within groups. There is also some evidence that this increase in inequality was accompanied by an increase in the pace of technological changes which require the learning of new skills, as well as by an increasese in occupational mobility.The question this paper asks is what are the consequences of (i) an increase in the depreciation rate of skills, or (ii) an increase in occupational mobility for wage earnings dispersion in an economy in which people learn new skills at different rates. To answer this question, a Ljungqvist and Sargent (1998) type of economy is modified to include two distinct populations. What distinguishes them is the rate at which they accumulate new skills while on the job. Skills are partly job specific, so if a particular job disappears, workers in that job experience a skill .When the rate at which skills depreciate, or occupational mobility, increase, there is an increase in the value of the ability to master new skills faster. In the context of a model calibrated to reproduce some statistics drawn from CPS and DWS data, such increases imply increases in inequality between fast learners and slow learners, but have little effect on withn-group inequality.