U.S. Wages in General Equilibrium: The Effects of Prices, Technology, and Factor Supplies, 1963-1991

42 Pages Posted: 11 Aug 1999

See all articles by James Harrigan

James Harrigan

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Rita A. Balaban

University of Pittsburgh - Department of Economics; Samford University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 1998

Abstract

Wage inequality in the United States has increased in the past two decades, and most researchers suspect that the main causes are changes in technology, international competition, and factor supplies. The relative importance of these causes in explaining wage inequality is important for policy making and is controversial, partly because there has been no research which has directly estimated the joint impact of these different causes. In this paper, we view wages as arising out of a competitive general equilibrium where goods prices, technology and factor supplies jointly determine outputs and factor prices. We specify an empirical model which allows us to estimate the general equilibrium relationship between wages and technology, prices, and factor supplies. The model is based on the neoclassical theory of production and is implemented by assuming that GDP is a function of prices, technology levels, and supplies of capital and different types of labor. We treat final goods prices as being partially determined in international markets, and we use data on trends in the international economy as instruments for U.S. prices. We find that relative factor supply and relative price changes are both important in explaining the growing return to skill. In particular, we find that capital accumulation and the fall in the price of traded goods served to increase the return to education.

JEL Classification: F1, F3, D5

Suggested Citation

Harrigan, James and Balaban, Rita A., U.S. Wages in General Equilibrium: The Effects of Prices, Technology, and Factor Supplies, 1963-1991 (December 1998). FRB of New York Staff Report No. 64. Available at SSRN: https://ssrn.com/abstract=163168 or http://dx.doi.org/10.2139/ssrn.163168

James Harrigan (Contact Author)

University of Virginia - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Rita A. Balaban

University of Pittsburgh - Department of Economics

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Samford University - School of Business

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Dept. of Economics
Birmingham, AL 35229
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