Working Paper: CEPR ID: DP2765
Authors: Giovanni L. Violante
Abstract: This Paper provides an interpretation for the recent rise in residual wage inequality which is consistent with the empirical observation that a sizeable part of this increase has a transitory nature, a feature that eludes standard models based on ex-ante heterogeneity in ability. In the model an acceleration in the rate of quality-improvement of equipment, like the one observed from the early 70's, reduces workers? capacity to transfer skills from old to new machines. This force generates a rise in the cross-sectional variance of skills, and therefore of wages. Through calibration, the Paper shows that this mechanism can account for 30% of the surge in residual inequality in the US economy (or for most of its transitory component). Two key implications of the theory - faster within job wage growth and larger wage losses upon displacement - find empirical support in the data.
Keywords: earnings instability; skill transferability; technological acceleration; wage inequality; wage loss upon displacement
JEL Codes: E24; J31; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Acceleration in the rate of quality improvement of equipment (O39) | Reduction in workers' capacity to transfer skills from old to new machines (J24) |
| Reduction in workers' capacity to transfer skills from old to new machines (J24) | Increased variance in skills and wages (J31) |
| Increased variance in skills and wages (J31) | Increased residual wage inequality in the U.S. economy (J31) |
| Technological acceleration (O33) | Wage growth on the job (J31) |
| Displacement (J63) | Average wage loss for displaced workers (J65) |