Determinants of wage and earnings inequality in the United States

The skill premium in the United States has gone up significantly between the 1960’s and the 2000’s. During the same period, individual wage volatility has also increased. Using a model that incorporates the technology-education race model of Tinbergen (1974) into a standard incomplete markets model, this paper shows that the rise in individual wage risk is an important contributor to the rise in skill premium. Depending on the decomposition method, the rise in wage risk explains 9% or 17% of the total rise in skill premium between the 1960’s and the 2000’s.