National Institute Economic Review

The US experienced a considerable increase in inequality between skilled and less-skilled workers during the early 1980s-a period which corresponds with a large temporary appreciation of the dollar. This article investigates the reasons behind this rise in inequality by evaluating the impact of trade with low-wage countries (LWCs) and technological change on the wage bill share of skilled workers (which is designed to capture movements in inequal ity arising from changes in both the relative wage and employment opportunities of the less-skilled). We find that an increase in US imports from LWCs-encouraged by the large appreciation of the dollar in the early 1980s- seems to explain some of the rise in US inequality in low-skill-intensive sectors, but that technological change (proxied by R&D expenditure) explains the rise in inequality in high-skill-intensive sectors. However, given that the timing of the sudden rise in US R&D expenditure corresponds with the appreciation of the dollar, it may be the case that the deterioration in US trade competitiveness during this period contributed to the rapid increase in the rate of technological change via mechanisms such as 'defensive innovation'. Hence one might also argue that the technology-based explanation for the rise in US inequality could actually be a trade-based explanation.

In this article I consider shifts in the structure of wages in Britain between the mid-1970s and mid-1990s. In the 1990s the rising gap between the highest and lowest paid was either stable or rose a little, but by nowhere near as much as in the 1980s. This seems to be, at least partially, due to the fact that faster educational upgrading has dampened down some of the rising wage differentials experienced by the more educated. However, demand still seems to be shifting in favour of the more highly educated and skilled because, despite the fact that there are many more workers with higher educational qualifications, their wages relative to other groups have not fallen. Finally, I argue that relative demand shifts in favour of the more educated and skilled are still more pronounced in more technologically advanced industries. This is in line with the notion, like much of the evidence based on industry demand shifts in the 1970s and 1980s, that technology is key to changes in labour market inequality.

Traditional macroeconomic models are based on the concept of a single representative consumer. A great deal can be gained by constructing a dynamic general equilibrium economic model which represents the behaviour of a panel of consumers spread out along the income distribution. Such a framework allows us to assess the distributional impact of policy changes. We present here such a model, showing the behaviour of consumers facing uncertain incomes and we use it to assess the distributional impact of changes to pension provision. We find that means testing of old age pensions increases inequality among the retired because of the effect it has on incentives to save.