Skill-Biased Technological Change and Inequality in the U.S.

Abstract

Since the 1980s, income inequality has increased markedly and has reached the highest level ever since it started being recorded in the U.S. This paper uses an overlapping generations model with incomplete markets that allows for household heterogeneity that is calibrated to match the U.S. economy with the purpose to study how skill-biased technological change (SBTC) and changes in taxation quantitatively account for the increase in inequality from 1980 to 2010. We find that SBTC and taxation decrease account for 48% of the total increase in the income Gini coefficient. In particular, we conclude that SBTC alone accounted for 42% of the overall increase in income inequality, while changes in the progressivity of the income tax schedule alone accounted for 5.7%.