Skill Price Disparities Drive Labor Market Inequality
The Federal Reserve Bank of Minneapolis has released a study on labor market trends, revealing that within-occupation wage inequality has increased significantly since 1980. The researchers attribute this rise to differences in skill prices, rather than changes in worker composition. In cognitive-intensive occupations, the price of skills such as problem-solving and creativity is higher, leading to greater inequality among workers.
The study uses a general equilibrium model that accounts for heterogeneous workers who supply multiple skills jointly. This approach allows researchers to isolate the effect of skill prices on wage inequality within occupations. The data shows that about one-third of the rise in within-occupation inequality from 1980 to 2010 can be attributed to differences in skill prices.
The study also finds that a uniform increase in the productivity of cognitive skills can drive up inequality in cognitive-intensive occupations and reduce it in manual ones. This is consistent with the observed trends in the data.