The supply and price of skilled labor relative to unskilled labor have changed dramatically over the postwar period. The relative quantity of skilled labor has increased substantially, and the skill premium, which is the wage of skilled labor relative to that of unskilled labor, has grown significantly since 1980. Many studies have found that accounting for the increase in the skill premium on the basis of observable variables is difficult and have concluded implicitly that latent skill-biased technological change must be the main factor responsible. This paper examines that view systematically. We develop a framework that provides a simple, explicit economic mechanism for understanding skill-biased technological change in terms of observable variables, and we use the framework to evaluate the fraction of variation in the skill premium that can be accounted for by changes in observed factor quantities. We find that with capital-skill complementarity, changes in observed inputs alone can account for most of the variations in the skill premium over the last 30 years.

We show that a theory of earnings and wealth inequality, based on the optimal choices of ex ante identical households that face uninsured idiosyncratic shocks to their endowments of efficiency labor units, accounts for the U.S. earnings and wealth inequality almost exactly.

Global financial imbalances can result from financial integration when countries differ in financial markets development. Countries with more advanced financial markets accumulate foreign liabilities in a gradual, long-lasting process. Differences in financial development also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of nondiversifiable equity and foreign direct investment. Three observations motivate our analysis: (1) financial development varies widely even among industrial countries, with the United States on top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international financial integration; (3) the portfolio composition of U.S. net foreign assets features increased holdings of risky assets and a large increase in debt. (c) 2009 by The University of Chicago. All rights reserved..

We study a dynamic version of Meltzer and Richard's median-voter model of the size of government. Taxes are proportional to total income, and they are redistributed as equal lump-sum transfers. Voting takes place periodically over time, and each consumer votes for the tax rate that maximizes his equilibrium utility. We calibrate the model to U.S. data. Key elements in the calibration are the income and wealth distribution and the parameters governing the leisure and consumption choices. The total size of transfers predicted by our political-economy model is quite close to the size of transfers in the data.

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We study a positive theory of stagnation and growth aimed at understanding the large variations in growth outcomes across actual economies. The theory points to the fundamental role played by vested interests in determining policies which are key to the growth process: some agents seek to prevent the adoption of new technologies. We develop a model of technology adoption, and show how technological innovation may sow the seeds of its own destruction. In particular, we find that the equilibrium is characterized by a long cycle of stagnation and growth. Over this cycle, incumbent innovators have sufficient political influence that new technologies are prohibited, and only as these incumbents are phased out of the economy will new innovation occur. In formalizing our theory we make a methodological contribution by characterizing dynamic voting equilibria in which voters must forecast the effects of different current policies on future prices and policy outcomes."The political economy of technological change is only dimly understood. To some observers, technological change seems to resemble the human life cycle: the vigor of youth is followed by the caution of maturity and finally the feebleness of old age and the 'climacteric'.... If we are to understand why the fires of innovation die down, we must propose a model in which technological progress creates the conditions for its own demise." (Mokyr (1990a), p. 261)Motivated by the large variations in medium-and long-run economic performance across countries and within countries over time, we study what we believe is crucial for understanding these observations: the process of technological change. Our approach differs from much of the recent literature on economic growth in that we focus on the sociopolitical process determining growth-oriented economic policies, rather than on what policies are good per se. The pervasiveness of growth-preventing policies-policies that reduce the incentives for investment and technological innovation-suggests that it is especially important to study policy determination in the context of economic growth. Our way of understanding the existence of such policies rests on a notion of vested interests: residual claimants of the currently operated technology try to block the emergence of superior technologies by using the political process. 301 at University of Virginia on July 12, 2015 http://restud.oxfordjournals.org/ Downloaded from 302 REVIEW OF ECONOMIC STUDIESOur point of view leads to a process of technological change which is fundamentally fragile. The first contribution of this paper is to formalize the idea of vested interests in the context of a model of technological change, and, in particular, to give formal meaning to what was hinted at in our opening quotation: the possibility that technological progress may sow the seeds of its own destruction, leading to a slower pace of technological change and growth than is technologically efficient. More precisely, we find that our theory can account for policies which imply very poor g...

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We document the business cycle behavior of the US income distribution and explore the extent to which unemployment spells and cyclically-moving factor shares account for this behavior by analyzing four heterogeneous household extensions of the neoclassical growth model. We conclude (i) that partitioning the population into five types subject to type-specific employment processes seems to be enough to account for most aspects of the US income distribution business cycle dynamics, (ii) that the role played by cyclically-moving factor shares is small, and (iii) that the income distribution business cycle dynamics may be essentially independent from the significant part of the observed wealth concentration that these model worlds fail to account for.