Ability Distribution and Dynamics of Wage Inequality: Unintended Consequences of Human Capital Accumulation

Kirill Borissov, Aleksey Minabutdinov () and Roman Popov
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Aleksey Minabutdinov: Center of Economic Research, ETH Zurich, Zurichbergstrasse 18, 8092 Zurich, Switzerland
Roman Popov: European University at St. Petersburg, Russia

No 24/393, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: This study investigates the dynamics of between-group and within-group wage inequality in a model with heterogeneous learning abilities putting a key emphasis on the shape of the ability distribution. In our model, intergenerational human capital externalities incentivize individuals to invest in skills, consequently reshaping the composition of the labor force by expanding the proportion of skilled workers from the lower end of ability distribution. We show that if, in the process of human capital accumulation, the skill premium increases, then wage inequality among skilled workers, as measured by the Gini coefficient, also increases. For several common distributions of abilities, the composition effect contributes to an upward shift in the between-group inequality and inequality among skilled workers. We also demonstrate that the composition effect contributes to an increase in wage inequality when ability distributions are represented by empirical distributions of students’ assessment scores.

Keywords: human capital; wage inequality; skill premium; composition effect (search for similar items in EconPapers)
JEL-codes: I24 J24 J31 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2024-07
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