Capital-skill complementarity and rising wage inequality in the UK

Abstract

The consensus in the literature investigating the causes of increased wage inequality in developed nations since 1980 is that skill-biased technical change is responsible for the widening of the wage distribution. A shortcoming in this literature is that technical change is commonly determined residually; that is, those changes in relative wages unexplained by other factors are attributed to changes in technology. We move this on by specifying a CGE model that identifies four labour types and four capital assets. When capital assets are measured in efficiency units and there is capital-skill complementarity, we can explain a large component of the increase in UK wage inequality in terms of changes in factor endowments. This is the first CGE analysis of relative wages to link changes in technology with movements in observable variables and also the first investigation of the connection between capital-skill complementarity and rising wage inequality and in the UK.