IDEAS home Printed from https://ideas.repec.org/p/zbw/vfsc15/113021.html
   My bibliography  Save this paper

Determinants of Wage and Earnings Inequality in the United States

Author

Listed:
  • Slavik, Ctirad
  • Yazici, Hakki

Abstract

The U.S. wage and earnings distributions display significantly higher levels of inequality today compared to the late 1960's. The aim of this paper is twofold. First, we want to assess to what extent the observed changes in inequality can be explained by a model that incorporates the technology-education race model of Tinbergen (1974) into a standard incomplete markets model that macroeconomists use to study inequality. Second, we want to use this model to decompose the changes in the skill premium and in overall inequality into four components: skill-biased technical change, increase in the relative supply of skilled workers, increase in residual wage volatility, and changes in tax policy. We construct an incomplete markets model with capital-skill complementarity in which the wage distribution responds endogenously to technological changes. That is, technological advancements - modeled as a decline in the price of equipments - increase the amount of equipments in the economy which increases the skill premium endogenously. We calibrate the deep parameters of the model to late 1960's U.S. economy and find that the model matches well the inequality measures in the data. We find that our model overestimates somewhat the changes in both the skill premium and overall measures of inequality between the 1960's and the 2000's. We then decompose the change in inequality into changes in technology, relative supply of skilled workers, residual wage risk, and taxes. In line with Tinbergen's technology-education race theory, we find that the skill premium is most significantly affected by the changes in technology and supply of skilled workers. We also identify a mechanism not previously analyzed in the literature: an increase in residual wage risk leads to higher precautionary savings and thus to higher levels of aggregate capital. Due to capital-skill complementarities in the production function, this leads to an increase in the skill premium and thus to a further increase in inequality.

Suggested Citation

  • Slavik, Ctirad & Yazici, Hakki, 2015. "Determinants of Wage and Earnings Inequality in the United States," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113021, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:113021
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/113021/1/VfS_2015_pid_489.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Fatih Guvenen & Burhanettin Kuruscu & Serdar Ozkan, 2014. "Taxation of Human Capital and Wage Inequality: A Cross-Country Analysis," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 818-850.
    2. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
    3. Karen Kopecky & Richard Suen, 2010. "Finite State Markov-chain Approximations to Highly Persistent Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 701-714, July.
    4. He, Hui, 2012. "What drives the skill premium: Technological change or demographic variation?," European Economic Review, Elsevier, vol. 56(8), pages 1546-1572.
    5. Markus Poschke & Baris Kaymak & Ozan Bakis, 2012. "On the Optimality of Progressive Income Redistribution," 2012 Meeting Papers 837, Society for Economic Dynamics.
    6. Slavik, Ctirad & Yazici, Hakki, 2014. "On the Consequences of Eliminating Capital Tax Differentials," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100479, Verein für Socialpolitik / German Economic Association.
    7. Tinbergen, Jan, 1974. "Substitution of Graduate by Other Labour," Kyklos, Wiley Blackwell, vol. 27(2), pages 217-226.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc15:113021. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - Leibniz Information Centre for Economics). General contact details of provider: http://edirc.repec.org/data/vfsocea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.