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

Fatih Guvenen () and Burhanettin Kuruscu

No 13096, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E21 E24 J24 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-hrm, nep-lab and nep-mac
Date: 2007-05
Note: EFG LS
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