The skill premium has increased significantly in the United States in the last five decades.
During the same period, individual wage risk has also increased. This paper proposes a
mechanism through which a rise in wage risk increases the skill premium. Intuitively, a
rise in uninsured wage risk increases precautionary savings, thereby boosting capital
accumulation, which increases the skill premium due to capital-skill complementarity.
Using a quantitative macroeconomic model, we find that the ...
The skill premium has increased significantly in the United States in the last five decades.
During the same period, individual wage risk has also increased. This paper proposes a
mechanism through which a rise in wage risk increases the skill premium. Intuitively, a
rise in uninsured wage risk increases precautionary savings, thereby boosting capital
accumulation, which increases the skill premium due to capital-skill complementarity.
Using a quantitative macroeconomic model, we find that the rise in wage risk observed
between 1967 and 2010 increases the skill premium significantly. This finding is robust
across a variety of model specifications.
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