Wage Inequality and the Rise of the Service Sector
The problem: How do we explain the evolution of the skill premium? Over the past decade, an enormous body of literature has examined the evolution of the skill premium, i.e. the ratio of educated workers wage to that of relatively uneducated workers. Specifically, the skill premium in the US (college graduates relative to high school graduates) rose from 1.35 in 1975 to 1.5 in 1985 to 1.75 in 1995 - despite increases in the relative supply of college graduates. An obvious explanation is that demand for skilled labor has risen sufficiently fast so as to offset the increase in supply, thus instigating a rising skill premium. Such demand shifts are often attributed to skill biased technological change (SBTC).