Risk, Occupational Choice, and Inequality

This essay presents a new theory explaining increased wage inequality. A standard endogenous growth model is augmented with occupational choice of highskill workers. Depending on the occupational choice, high-skill workers earn either a certain or uncertain income. Wage inequality, measured by the average wage of high-skill workers divided by the average wage of low-skill workers, can increase or decrease due to an increased supply of high-skill workers.

Introduction: There is a growing consensus that over the last 25 years, the dispersion of income and wages have increased in developed countries. The U.S. and the U.K experienced a larger dispersion earlier then most other countries but later several other countries fell in line. Those changes are well documented by among others Förster and Pearson (2002). The dispersion of wages can be decomposed into dispersion among individuals with similar characteristics (residual wage inequality) and dispersion between individuals with different characteristics, such as for example skill, experience or gender.

Author: Klas Sandén

Source: Göteborg University

Download URL 2: Visit Now