Kiel Working Papers, Kiel Institute for World Economics
No 1749:
Decompositions of Wage Inequality and Growth in an Advanced Economy open to Trade
Matthias Lücke T. Huw Edwards
Abstract: We explore the uses of double-calibrated general
equilibrium models as a decomposition tool for analysing contributory
factors in the growth and increasing wage inequality in an advanced economy
(the UK) since 1979. Calibration of a model to start and end years, based
upon an assumed functional form and parameter values, produces a consistent
set of decompositions for both growth and inequality. Calibrated TFP growth
is consistent with the results from nonparametric growth accounting. The
calibration procedure also allows us to explore different exogeneity
assumptions regarding capital. However, there are more problems to
modelling inequality than with growth: in particular, the main models in
the literature, which take skill endowments as given, are
characteristically unstable. This strongly emphasises the need for a more
dynamic modelling technique, particularly regarding the skill acquisition
decision and potential labour market mismatch issues
Keywords: general equilibrium, wage inequality, trade, growth; (follow links to similar papers)
JEL-Codes: C68,; F16,; O4; (follow links to similar papers)
20 pages, December 2011
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