Labour market effects of wage inequality and skill-biased technical change

Abstract

This paper analyses the effects of wage inequality on labour market development. Relevant theories are ambiguous, just as public debates. We measure the effects of inequality, skill-biased and skill-neutral technical change on hours, productivity and wages in a novel structural vector error correction framework identified by economically motivated long-run restrictions. The results show that structural inequality shocks have a negative impact on hours, productivity and wages. These effects are particularly pronounced at high inequality levels and for inequality below the median wage. Skill-biased technology shocks reduce–unlike skill-neutral ones–hours but increase inequality, productivity and wages.