Abstract

Wage Risk and the Skill Premium

Highlights

  • The substantial increase in the wages of college graduates relative to those without college education, the skill premium, is one of the most notable inequality trends observed in the United States in recent decades

  • We find that the rise in wage risk alone increases the skill premium to 1.70, an increase of 18 percentage

  • The main purpose of this section is to evaluate the quantitative implications of the rise in residual wage risk for the skill premium using our model

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Summary

Introduction

The substantial increase in the wages of college graduates relative to those without college education, the skill premium, is one of the most notable inequality trends observed in the United States in recent decades. Another important finding that has been documented by Gottschalk and Moffitt (1994), Heathcote, Storesletten, and Violante (2010), Gottschalk and Moffitt (2012) and Hong, Seok, and You (2017), among others, is that U.S workers face a considerably higher level of individual wage risk than in the past. The rise in the capital stock increases the skill premium due to capital-skill complementarity

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