DP13785 Trading Up and the Skill Premium

Author(s): Nir Jaimovich, Sérgio Rebelo, Arlene Wong, Miao Zhang
Publication Date: June 2019
Keyword(s): growth, inequality, Quality, skill premium
JEL(s): J2, O4
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13785

We study the impact on the skill premium of increases in the quality of goods consumed by households ("trading up"). Our empirical work shows that high- quality goods are more intensive in skilled labor than low-quality goods and that household spending on high-quality goods rises with income. We propose a model consistent with these facts. This model accounts for the past rise in the skill premium with more plausible rates of skill-biased technical change than those required by the canonical model. It also implies that an expansion of the skilled labor force reduces the skill premium by much less than in the canonical model.