Can't SBTC explain the U.S. wage inequality dynamics?

Yip, Chi Man (2010): Can't SBTC explain the U.S. wage inequality dynamics?

Abstract

Based on the effect of skill-biased technology change (SBTC), this paper builds a search model with heterogeneous firms and workers to explain the dynamics of the wage inequality in the U.S. from 1963-2005. Firms differ in capital intensity (technology content) of the job created and workers differ in their education level. As the match-specific productivity is stochastic, the productivity threshold of employment of each education-job pair matched is endogenously determined. The advance in skill-biased technology increases the productivity of the highly educated workers as well as the capital intensity facing firms when creating high-tech jobs. We argue that in response to the rise in the capital intensity, high-tech firms increase the productivity thresholds of hiring, which leads to wage increment in the high-tech sector, and thus widening the residual wage inequality. Meanwhile, the increase in the productivity of the highly educated worker in the high-tech sector results in higher education premium in both the high-tech and low-tech sectors. Using the historical U.S. data, calibration shows that SBTC can explain the general trends in the education premium and the residual wage inequality from 1963-2005. In particular, it solves the puzzle why the education premium fell but the residual wage inequality grew in the early 1970s.

• Item Type: MPRA Paper
• Language: English
• Keywords: SBTC; Education Premium; Residual Wage Inequality; Capital Intensity
• Subjects: J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Labor Contracts; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity

References

Abowd, John M., Francis Kramarz, and David N. Margolis. (2002) „Higher wage workers and high wage firms.“ Econometrica, 67: 251-333.

Acemoglu, Daron. (1998) „Why do new technologies complement skills? Directed technical change and wage inequality.“ Quarterly Journal of Economics, 113: 1055-90.

Acemoglu, Daron. (1999) „Changes in unemployment and wage inequality: An alternative theory and some evidence.“ American Economic Review, 89: 1259-78.

Acemoglu, Daron. (2001) „Good jobs versus bad jobs.“ Journal of Labor Economics, 19: 1-21.

Acemoglu, Daron. (2002) „Directed technical change.“ Review of Economic Studies, 69: 781-809.

Acemoglu, Daron. (2003) „Patterns of skill premia.“ Review of Economic Studies, 70: 199-230.

Allen, Steven G. (2001) „Technology and the wage structure.“ Journal of Labor Economics, 19: 440-83.

Autor, David H., Lawrence F. Katz, and Alan B. Krueger. (1998) „Computing Inequality: Have computers changed the labor market?“ Quarterly Journal of Economics, 113:1169-215.

Autor, David H, Lawrence F. Katz, and Melissa S. Kearney. (2008) „Trends in U.S. wage Inequality: Revising the revisionists.“ Review of Economics and Statistics, 90: 300-23.

Barron, John M. (1975) „Search in the labor market and the duration of unemployment: Some empirical evidence.“ American Economic Review, 65: 934-42.

Bartel, Ann P., and Nachum Sicherman. (1999) „Technological change and wages: An inter-industry analysis.“ Journal of Political Economy, 107: 285-325.

Berman, Eli, John Bound, and Zvi Griliches. (1994) „Changes in the demand for skilled labor within U.S. manufacturing: Evidence from the annual survey of manufactures.“ Quarterly Journal of Economics, 109: 367-97.

Blazquez, Maite, and Marcel Jansen. (2008) „Search, mismatch and unemployment.“ European Economic Review, 52: 498-526.

Bound, John, and George Johnson. (1992) „Changes in the structure of wages in the 1980's: An evaluation of alternative explanations.“ American Economic Review, 82: 371-92.

Card, David, and John E. DiNardo. (2002) „Skill-biased technological change and rising wage inequality: Some problems and puzzles.“ Journal of Labor Economics, 20: 733-83.

Caselli, Francesco. (1999) „Technological revolutions.“ American Economic Review, 89: 78-102.

Chevalier, Arnaud. (2003) „Measuring Over-education.“ Economica, 70: 509-31.

Cohn, Elchanan, and Ying C. Ng. (2000) „Incidence and wage effects of overschooling and underschooling in Hong Kong.“ Economics of Education Review, 19: 159-68.

Cole, Harold L., and Richard Rogerson. (1999) „Can the Mortensen-Pissarides matching model match the business-cycle facts?“ International Economic Review, 40: 933-59.

Daly, Mary C., Felix Buchel, and Greg J. Duncan. (2000) „Premiums and penalties for surplus and deficit education Evidence from the United States and Germany.“ Economics of Education Review, 19: 169-78.

Davis, Stephen, and John Haltiwanger. (1992) „Gross job creation, gross job destruction, and employment reallocation.“ Quarterly Journal of Economics, 107: 819-63.

DiNardo, John E., Nicole M. Fortin, and Thomas Lemieux. (1996) „Labor market institutions, and the distribution of Wages, 1973-1992: A semiparametric approach.“ Econometrica, 64: 1001-44.

Dolado, Juan J., Marcel Jansen, and Juan F. Jimeno. (2009) „On-the-job search in a matching model with heterogeneous jobs and workers.“ Economic Journal, 119: 200-28.

Frenette, Marc. (2004) „The overqualified Canadian graduate: The role of the academic program in the incidence, persistence, and economic returns to overqualification.“ Economics of Education Review, 23: 29-45.

Gottschalk, Peter. (1997) „Inequality, income growth, and mobility: The basic facts.“ Journal of Economic Perspectives, 11: 21-40.

Jovanovic, Boyan. (1979) „Job matching and the theory of turnover.“ Journal of Political Economy, 87: 972-90.

Juhn, Chinhui, Kevin M. Murphy, and Brooks Pierc. (1993) „Wage inequality and the rise in returns to skill.“ Quarterly Journal of Economics, 101: 410-42.

Katz, Lawrence F., and Kevin M. Murphy. (1992) „Changes in relative wages: Supply and demand factors.“ Quarterly Journal of Economics, 107: 35-78.

Kiker, B.F., Maria C. Santos, and De Oliveira M. Mendes. (1997) „Overeducation and undereducation: Evidence for Portugal.“ Economics of Education Review, 16: 111-25.

Krueger, Alan B. (1993) „How computers have changes the wage structure: Evidence from microdata, 1984-1989.“ Quarterly Journal of Economics, 108: 33-60.

Lemieux, Thomas. (2006) „Increased residual wage inequality: Composition effects, noisy data, or rising demand for skill.“ American Economic Review, 96: 461-98.

Leonardi, Macro. (2007) „Firm heterogeneity in capital-labor ratios and wage inequality.“ Economic Journal, 117: 375-98.

Levy, Frank, and Richard J. Murnane. (1992) „U.S. earnings levels and earnings inequality: A review of recent trends and proposed explanations.“ Journal of Economic Literature, 30: 1333-81.

McGuinness, Seamus, and Jessica Bennett. (2007) „Overeducation in the graduate labour market: A quantile regression approach.“ Economics of Education Review, 26: 521-31.

Merz, Monika. (1995) „Search in the labor market and the real business cycle.“ Journal of Monetary Economics, 36: 269-300.

Pissarides, Christopher A. (1986) „Unemployment and vacancies in Britain.“ Economic Policy, 3: 499-559.

Rubb, Stephen. (2003) „Overeducation: A short or long run phenomenon for individuals?“ Economics of Education Review, 22: 389-94.

Rumberger, Russell W. (1987) „The impact of surplus schooling on productivity and earnings.“ Journal of Human Resources, 22: 24-50.

Shi, Shouyong. (2002) „A Directed Search Model of Inequality with heterogeneous skills and skill-biased technology.“ Review of Economic Studies, 69: 467-91.

Sicherman. Nachum. (1991) „Overeducation in the Labor Market.“ Journal of Labor Economics, 9: 101-22.

Vahey, Shaun P. (2000) „The great Canadian training robbery: Evidence on the returns to educational mismatch.“ Economics of Education Review, 19: 219-27.

Verdugo, Richard R., and Naomi T. Verdugo. (1989) „The impact of surplus schooling on earnings: Some additional findings.“ Journal of Human Resources, 24: 629-43.

Wong, Linda Y. (2003) „Can the Mortensen-Pissarides model with productivity changes explain U.S. wage inequality?“ Journal of Labor Economics, 21: 70-105.