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The supply and price of skilled labor relative to unskilled labor have changed dramatically over the postwar period. The relative quantity of skilled labor has increased substantially, and the skill premium, which is the wage of skilled labor relative to that of unskilled labor, has grown significantly since 1980. Many studies have found that accounting for the increase in the skill premium on the basis of observable variables is difficult and have concluded implicitly that latent skill-biased technological change must be the main factor responsible. This paper examines that view systematically. We develop a framework that provides a simple, explicit economic mechanism for understanding skill-biased technological change in terms of observable variables, and we use the framework to evaluate the fraction of variation in the skill premium that can be accounted for by changes in observed factor quantities. We find that with capital-skill complementarity, changes in observed inputs alone can account for most of the variations in the skill premium over the last 30 years.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small-and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption. JEL Non-technical SummaryA prerequisite for the successful conduct of monetary policy is a satisfactory understanding of the monetary transmission mechanism -the ensemble of economic forces that link monetary policy to the aggregate performance of the economy. This paper is concerned with the transmission mechanism of monetary policy for the largest component of GDP: household consumption.Changes in interest rates may affect household consumption through both direct and indirect effects. Direct effects are those that operate even in the absence of any change in household labor income: when interest rates fall, intertemporal substitution induces households to save less or borrow more, and therefore to increase their consumption demand. In general equilibrium, additional indirect effects on consumption arise from the expansion in labor demand, and thus in labor income, that emanates from the direct effects of the original interest rate cut.Understanding the monetary transmission mechanism requires an assessment of the importance of these direct and indirect channels. The relative magnitude of these effects is determined by how strongly household consumption responds to interest rate and income changes. Our first result concerns Representative Agent New Keynesian (RANK) models. In these commonly used benchmark economies, the aggregate consumption response to a change in interest rates is driven entirely by the Euler equation of the representative household. This implies that for any reasonable parameterization, monetary policy in RANK models works almost exclusively through intertemporal su...

We conduct a systematic empirical study of cross-sectional inequality in the United States, integrating data from the Current Population Survey, the Panel Study of Income Dynamics, the Consumer Expenditure Survey, and the Survey of Consumer Finances. In order to understand how different dimensions of inequality are related via choices, markets, and institutions, we follow the mapping suggested by the household budget constraint from individual wages to individual earnings, to household earnings, to disposable income, and, ultimately, to consumption and wealth. We document a continuous and sizable increase in wage inequality over the sample period. Changes in the distribution of hours worked sharpen the rise in earnings inequality before 1982, but mitigate its increase thereafter. Taxes and transfers compress the level of income inequality, especially at the bottom of the distribution, but have little effect on the overall trend. Finally, access to financial markets has limited both the level and growth of consumption inequality.

This paper explores the macroeconomic and welfare implications of the sharp rise in U.S. wage inequality . In the data, cross-sectional earnings variation increased substantially more than wage variation, due to a sharp rise in the wage-hours correlation. At the same time, inequality in hours worked and consumption remained roughly constant through time. Using data from the PSID, we decompose the rise in wage inequality into changes in the variance of permanent, persistent and transitory shocks. With the estimated changes in the wage process as the only primitive, we show that a standard calibrated OLG model with incomplete markets can successfully account for all these patterns in cross-sectional U.S. data. Through a set of counter-factual experiments, we assess the role of each component of the wage process for the evolution in the various dimensions of inequality. The model also allows us to investigate the welfare costs of the rise in inequality: we find that the unconditional expected welfare loss is equivalent to a 5 percent decline in lifetime income for the worst-affected cohorts, those entering the labor market in the mid 1980's. Ex post, these costs are widely dispersed across agents, due both to differences in permanent individual attributes and to differences in labor market histories. An extensive sensitivity analysis verifies the robustness of our results to alternative preferences and borrowing limits, and to the inclusion of female labor force participation. JEL Classification Codes: E21, D31.