Solow and Heterogeneous Labour: A Neoclassical Explanation of Wage Inequality

Abstract

This paper analyses the effect of human-capital investments of heterogeneous individuals on the dynamics of the wage structure within a neoclassical growth model. The accumulation of physical capital changes relative factor prices and thus incentives to acquire skills, thereby altering the composition of the labour force. Without relying on exogenous shocks, our framework generates dynamics that resemble important observations on wage inequality (e.g., the non-monotone evolution of the skill premium). Additional incorporation of wage rigidities emphasises the trade off between residual wage inequality and employment opportunities for unskilled labour that is consistent with country-specific evidence.

Between- and within-group wage inequalities, and the advent of new technology

“…Incorporating Meckl and Zink's [12] idea of educational choice into Caselli's framework, this paper has analyzed the within-group inequality in addition to the between-group inequality. As a result, it is shown that, when a shock diminishes the threshold ability, such as a decrease in the skill acquisition cost, then the within-group inequality among the skilled increases but the inequality among the unskilled workers decreases.…”

“…Aghion [3] and Meckl and Zink [12] are important exceptions. Aghion explains the aforementioned two puzzles using a single framework in which vintages of human capital play a key role.…”

“…Meckl and Zink [12] present an alternative approach. They also assume that individuals are born with different innate abilities.…”

“…Similar to Galor and Moav[7], Meckl and Zink[12], and Caselli, our model is based on the NelsonPhelps hypothesis[13].…”

Public Investment, Health Infrastructure and Income Growth

“…This economy accommodates labor of two types: skilled laborand unskilled labor. Education costs must be incurred in order to become a skilled laborer, as assumed by Caselli (1999), Meckl and Zink (2004), Miyake, Muro, Nakamura, and Yasuoka (2009), and by Chen(2010). That cost is assumed as  .…”