Earnings Inequality and Skill-Biased Technological Change with Endogenous Choice of Education

Abstract

This article analyzes the impact of stochastic skill-biased technological change on earnings inequality in a general equilibrium OLG model. Wage dispersion is determined by the heterogeneity of skills by allowing for productivity differences due to education, ability, and age. The model performs well in reproducing stylized facts on the time pattern of the U.S. wage distribution and human capital accumulation. In particular, it shows that slow adjustment of the supply of educated labor can itself explain the nonmonotonic time pattern of the college premium.