Task Prices, Skill Selection, and Wage Inequality (joint with Michael Böhm and Felix Schran)

Abstract:

This paper develops a new method to estimate changing task prices per unit of skill from an economic model of sector choice. Applying our method to German administrative panel data, we establish important links between occupational trends and surging wage inequality. First, changes of task prices and occupational employment growth go hand in hand. This fact contrasts with the relation of employment and average wages, which are uncorrelated. It furthermore is consistent with shocks to demand, for example via routinization or changing trade patterns. Second, the more an occupation grows, the larger is the skill difference between incumbents on the one hand and entrants or leavers on the other hand. Aggregating these differences with total net entry accounts for most of the declining skills of growing occupations, which counteract the effect of task prices when looking at wages. Third, task prices explain a sizable share of rising wage dispersion. Our empirical model is able to reproduce the increase of upper as well as lower-half wage inequality during the 1984-2010 period.