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Product Demand Shifts and Wage Inequality

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  • Leonardi, Marco

    (University of Milan)

Abstract
The UK and the US have experienced both rising skill premia and rising employment of skilled workers since the 1980s. These trends are typically interpreted as concurrent shifts of relative skill supplies and demands, and the demand shifts are attributed to skill-biased technological change or changes in international trade patterns. If more skilled workers demand more skill-intensive goods, then an exogenous increase in relative skill supplies will also induce a shift in relative demand. This channel reduces the need to rely on technology and trade to explain the patterns in the data. I illustrate this mechanism with a simple twosector general equilibrium model. The empirical part demonstrates that in the UK more educated and richer workers demand more skill-intensive goods. Calibration of the model suggests that this induced demand shift can explain 3% of the total relative demand shift in the UK between 1981 and 1997. The baseline model only explains between-industry shifts in skill upgrading and wage inequality, while empirically, most of these changes took place within industries. An extension of the model with different qualities of goods and labor can also explain some of the within-industry changes.

Suggested Citation

  • Leonardi, Marco, 2003. "Product Demand Shifts and Wage Inequality," IZA Discussion Papers 908, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp908
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    References listed on IDEAS

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    Cited by:

    1. Daron Acemoglu, 2019. "Comment on "Trading Up and the Skill Premium"," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 317-330, National Bureau of Economic Research, Inc.
    2. Stephen Machin, 2008. "An Appraisal of Economic Research on Changes in Wage Inequality," LABOUR, CEIS, vol. 22(s1), pages 7-26, June.
    3. Antonella Nocco, 2009. "Preference Heterogeneity And Economic Geography," Journal of Regional Science, Wiley Blackwell, vol. 49(1), pages 33-56, February.
    4. Goncharenko, V. & Shapoval, A., 2018. "Impact of Demand Structure and Market Size on Unemployment, Income Inequality and Social Welfare," Journal of the New Economic Association, New Economic Association, vol. 37(1), pages 12-33.
    5. Leonardi, Marco, 2010. "The Effect of Product Demand on Inequality: Evidence from the US and the UK," IZA Discussion Papers 5011, Institute of Labor Economics (IZA).
    6. Andy Baker, 2005. "Who Wants to Globalize? Consumer Tastes and Labor Markets in a Theory of Trade Policy Beliefs," American Journal of Political Science, John Wiley & Sons, vol. 49(4), pages 924-938, October.

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    More about this item

    Keywords

    income elasticity; demand shifts; wage inequality;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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