Determinants of Wage and Earnings Inequality in the United States

Ctirad Slavik and Hakki Yazici ()

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

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.

JEL-codes: E25 J31 O33 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/113021/1/VfS_2015_pid_489.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113021

Access Statistics for this paper

More papers in VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().