Skill-Biased Technological Change and Inequality in the U.S.

Ferrreira, Ana Melissa (2019): Skill-Biased Technological Change and Inequality in the U.S.

Abstract

Since the 1980’s, income inequality has increased markedly and is at the highest level ever since it has been recorded in the U.S. This paper uses an overlapping-generations model with incomplete markets that allows for household heterogeneity and that is calibrated to match the U.S. economy with the purpose to study how skill-biased technological change (SBTC) and changes in taxation quantitatively account for the increase in inequality from 1980 to 2010. We find that SBTC and taxation decrease account for 48% of the total increase in the income Gini coefficient. In particular, we conclude that SBTC alone accounted for 42% of the overall increase in income inequality, while changes in the progressivity of the income tax schedule alone accounted for 5,7%.

• Item Type: MPRA Paper
• Language: English
• Keywords: Technical change, Income Inequality, Wealth Inequality, Heterogeneity, Taxation
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; J - Labor and Demographic Economics > J0 - General

References

Abraham,A(2008).Earnings inequality and skill biased technological change with endogenous choice of education. Journal of the European Economic Association, 6(2-3).

Acemoglu, D. and Autor, D. (2011). Skills, tasks and technologies: Implications for employment and earnings. In Handbook of labor economics, volume 4.

Acemoglu, D. and Restrepo, P. (2016). The race between machine and man: Implications of technology for growth, factor shares and employment. Technical report, National Bureau of Economic Research.

Acemoglu, D. and Restrepo, P. (2018). Low-skill and high-skill automation. Journal of Human Capital, 12(2).

Aiyagari, S. R. (1995). Optimal capital income taxation with incomplete markets, borrowing con- straints, and constant discounting. Journal of political Economy, 103(6).

Autor, D. H., Levy, F., and Murnane, R. J. (2003). The skill content of recent technological change: An empirical exploration. The Quarterly journal of economics, 118(4).

Benabou, R. (2002). Tax and education policy in a heterogeneous-agent economy: What levels of redistribution maximize growth and efficiency? Econometrica, 70(2).

Brinca, P., Faria-e Castro, M., Ferreira, M. H., and Holter, H. A. (2019). The nonlinear effects of fiscal policy. Working Paper.

Brinca, P., Holter, H. A., Krusell, P., and Malafry, L. (2016). Fiscal multipliers in the 21st century. Journal of Monetary Economics, 77.

Brinca, P., Homem Ferreira, M., Franco, F. A., Holter, H. A., and Malafry, L. (2018). Fiscal consolidation programs and income inequality.

Diamond, P. A. (1998). Optimal income taxation: an example with a u-shaped pattern of optimal marginal tax rates. American Economic Review.

Eden, M. and Gaggl, P. (2018). On the welfare implications of automation. Review of Economic Dynamics, 29.

Ferriere, A. and Navarro, G. (2014). The heterogeneous effects of government spending: It’s all about taxes.

Golosov, M., Troshkin, M., and Tsyvinski, A. (2016). Redistribution and social insurance. Ameri- can Economic Review, 106(2).

Gorry, A. and Oberfield, E. (2012). Optimal taxation over the life cycle. Review of Economic Dynamics, 15(4).

Greenwood, J., Hercowitz, Z., and Krusell, P. (1997). Long-run implications of investment-specific technological change. The American Economic Review.

Guner, N., Kaygusuz, R., and Ventura, G. (2014). Income taxation of us households: Facts and parametric estimates. Review of Economic Dynamics, 17(4).

Haider, S. and Solon, G. (2006). Life-cycle variation in the association between current and lifetime earnings. American Economic Review, 96(4).

Heathcote, J., Perri, F., and Violante, G. L. (2010). Unequal we stand: An empirical analysis of economic inequality in the united states, 1967–2006. Review of Economic dynamics, 13(1).

Heathcote, J., Storesletten, K., and Violante, G. L. (2014). Consumption and labor supply with partial insurance: An analytical framework. American Economic Review, 104(7).

Heathcote, J., Storesletten, K., and Violante, G. L. (2017). Optimal tax progressivity: An analytical framework. The Quarterly Journal of Economics, 132(4).

Heckman, J. J., Lochner, L., and Taber, C. (1998). Explaining rising wage inequality: Explo- rations with a dynamic general equilibrium model of labor earnings with heterogeneous agents. Technical report, National Bureau of Economic Research.

Holter, H., Krueger, D., and Stepanchuk, S. (2017). How do tax progressivity and household heterogeneity affect laffer curves. Technical report, Working paper.

Karabarbounis, L. and Neiman, B. (2013). The global decline of the labor share. The Quarterly Journal of Economics, 129(1).

Katz, L. F. et al. (1999). Changes in the wage structure and earnings inequality. In Handbook of labor economics, volume 3.

Krueger, D., Ludwig, A., et al. (2013). Optimal Progressive Taxation and Education: Subsidies in a Model of Endogenous Human Capital Formation.

Krueger, D., Mitman, K., and Perri, F. (2016). Macroeconomics and household heterogeneity. In Handbook of Macroeconomics, volume 2.

Krusell, P., Ohanian, L. E., R ́ıos-Rull, J.-V., and Violante, G. L. (2000). Capital-skill complemen- tarity and inequality: A macroeconomic analysis. Econometrica, 68(5).

Manyika, J., Lund, S., Chui, M., Bughin, J., Woetzel, J., Batra, P., Ko, R., and Sanghvi, S. (2017). Jobs lost, jobs gained: Workforce transitions in a time of automation. McKinsey Global Institute.

Mendoza, E. G., Razin, A., and Tesar, L. L. (1994). Effective tax rates in macroeconomics: Cross- country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics, 34(3).

Mertens, K. and Montiel Olea, J. L. (2018). Marginal tax rates and income: New time series evidence. The Quarterly Journal of Economics, 133(4).

Mirrlees, J. A. (1971). An exploration in the theory of optimum income taxation. The review of economic studies, 38(2).

Murphy, K. M. and Welch, F. (1992). The structure of wages. The Quarterly Journal of Economics, 107(1).

Piketty, T. and Saez, E. (2003). Income inequality in the united states, 1913–1998. The Quarterly journal of economics, 118(1).

Reichling, F. and Whalen, C. (2012). Review of estimates of the frisch elasticity of labor supply. Saez, E. (2001). Using elasticities to derive optimal income tax rates. The review of economic studies, 68(1).

Stiglitz, J. E. (1982). Utilitarianism and horizontal equity: The case for random taxation. Journal of Public Economics, 18(1).

Trabandt, M. and Uhlig, H. (2011). The laffer curve revisited. Journal of Monetary Economics, 58(4).