The Role of Skills and Sorting in Explaining Wage Inequality

Abstract

A large literature argues that technological change since the 1980s altered the demand for workers’ skills, increasing wage inequality and polarization. By estimating a model of occupational choice using panel data from the Survey of Income and Program Participation (SIPP), I find that changes in the supply of workers’ skills were also major driving factors in increasing inequality and polarization. Specifically, I find that (1) as tasks in high-skill jobs have become increasingly complex, the distribution of workers’ ability to perform those tasks has become more dispersed, (2) workers’ ability to perform low-skill work tasks has become more homogenous, and (3) workers have increasingly sorted into occupations by skill level, even if this does not maximize their income. These results suggest that skill formation has been a key channel through which long run changes in the nature of work have affected wage inequality. Finally, to obtain my estimates I prove a new identification result in a multi-dimensional potential outcome model and show how to robustly estimate it semiparametrically adapting results from mixture models.