Working Paper: NBER ID: w8832
Authors: Daron Acemoglu
Abstract: The economics profession has made considerable progress in understanding the increase in wage inequality in the U.S. and the UK over the past several decades, but currently lacks a consensus on why inequality did not increase, or increased much less, in (continental) Europe over the same time period. I review the two most popular explanations for these differential trends: that relative supply of skills increased faster in Europe, and that European labor market institutions prevented inequality from increasing. I argue that these two explanations go some way towards accounting for the differential cross-country inequality trends, but do not provide an entirely satisfactory explanation. In addition, it appears that relative demand for skills increased differentially across countries. Motivated by this reasoning, I develop a simple theory where labor market institutions creating wage compression in Europe also encourage more investment in technologies increasing the productivity of less-skilled workers, thus implying less skill-biased technical change in Europe than in the U.S.
Keywords: No keywords provided
JEL Codes: J30; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Relative supply of skills in Europe (J24) | Lack of increase in wage inequality in Europe (F66) |
| European labor market institutions (J08) | Wage inequality (J31) |
| Institutional factors (D02) | Labor demand and wage structures (J31) |
| Institutional factors (D02) | Relationship between skill supply and wage inequality (F66) |
| Relative demand for skills in Europe (J24) | Wage inequality (J31) |