Entry Costs, Task Variety, and Skill Flexibility: A Simple Theory of (Top) Income Skewness

Manoj Atolia () and Yoshinori Kurokawa

Tsukuba Economics Working Papers from Faculty of Humanities and Social Sciences, University of Tsukuba

Abstract: This paper develops a simple model that provides a unified explanation for both an increase in below-top skewness and a much larger increase in within-top skewness of wage income distribution. It relies on a single mechanism based on the fixed costs of entry, linking a decrease in entry costs to an increase in both types of skewness under the assumption that higher-skilled workers are more flexible in handling a variety of tasks. Differences in flexibility are modeled as differences in the fixed setup costs required to handle a given number of tasks. Our numerical experiments in a calibrated model show that, by increasing task variety, a decrease in entry costs---entry deregulation---can be a quantitatively important source of both the increase in below-top skewness and the much larger increase in within-top skewness observed in the U.S. Moreover, the experiments imply that the observed differences in entry deregulation can cause significant differences in the top skewness across countries that have similar technological change. This can provide an answer to Piketty and Saez's (2006) question: Why have top wages surged in English speaking countries in recent decades but not in continental Europe or Japan, which have gone through similar @technological change?

Date: 2014-02, Revised 2018-07
New Economics Papers: this item is included in nep-pbe
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Journal Article: Entry Costs, Task Variety, and Skill Flexibility: A Simple Theory of (Top) Income Skewness (2021)
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