Abstract
Since the 1980s, income inequality has increased markedly and has reached the highest level ever since it started being recorded in the U.S. This paper uses an overlapping generations model with incomplete markets that allows for household heterogeneity 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%.
Highlights
Some argue that we are in the period of a “Forth Industrial Revolution”, which moved production function shares
Since the 1980s, income inequality has increased markedly and has reached the highest level ever since it started being recorded in the U.S This paper uses an overlapping generations model with incomplete markets that allows for household heterogeneity 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
Summary
Some argue that we are in the period of a “Forth Industrial Revolution”, which moved production function shares. As shown by Acemoglu and Restrepo (2018), low skill-automation will increase wage inequality because people are being substituted by machines or losing their job. Aiyagari (1995) ensures that with incomplete markets and uncertainty, optimal capital taxation is positive In this manner, the present article pretends to answer quantitatively how SBTC and taxation changes account for the paths of income inequality in the U.S from 1980 to 2010. Other related studies measure wage inequality through skill premium (Heckman, Lochner, and Taber 1998) We apart from this specification and take into account income and wealth distributions that the authors abstract from. We use income inequality instead of skill premium to account for the changes in wages.
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