Abstract:During the past four decades both between and within group wage inequality increased significantly in the US. I employ a model of signaling with credit constraints and private employer learning to pro...During the past four decades both between and within group wage inequality increased significantly in the US. I employ a model of signaling with credit constraints and private employer learning to provide a microfounded justification for this pattern. In particular, I show that the relaxation of financial constraints allowed talented individuals to acquire education and leave the uneducated pool, decreased unskilled-inexperienced wages and this in turn boosted wage inequality. The model accounts for: (i) the increase on the skill premium despite the growing supply of skills; (ii) the understudied aspect of rising wage inequality related to the increase on the experience premium; (iii) the sharp growth of the skill premium for inexperienced workers and its moderate expansion for the experienced ones; (iv) the puzzling coexistence of the increasing experience premium within the group of unskilled workers and its flat pattern among the skilled ones. The theoretical results are robust to empirically plausible extensions of the model and are still valid when the static model extends to a dynamic three-period OLG framework, which fits better the demography of the Current Population Survey. Importantly, this paper provides some interesting policy implications about the potential conflict between wage inequality and inequality of opportunity, as well as the role of minimum wage policy in determining the equilibrium wage inequality.Read More
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: article
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