Product Demand Shifts and Wage Inequality

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 08.12.2009, 12:15 - 13:30

   

Presentation by 

Marco Leonardi (University of Milan)
   

Abstract:

The US and the UK have experienced both rising skill premia and rising employment of skilled workers since the 1980s. These trends are typically attributed to skill-biased technical change or trade. If more skilled workers demand more skill-intensive goods, then an exogenous increase in relative skill supply will also induce a shift in relative skill demand. This channel reduces the need to rely on technology and trade to explain the patterns in the data. I illustrate this mechanism with a simple twosector general equilibrium model with non-homothetic preferences. This paper demonstrates that in the US and in the UK more educated and richer workers demand both more very low skill-intensive services (such as cleaning and personal services) and very high skill-intensive services(such as education and professional services). A parametrization of the model suggests that this induced demand shift can explain around 7% of the total relative demand shift in the US between 1980 and 2000. Similar results are provided for the UK.

   
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