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Tuesday, October 07, 2008

Skill-Based or Bubble-Based Wage Differentials?

Arindrajit Dube says there’s a paper he wishes to write once the data become available:

Does Mispricing of Financial Assets lead to Mispricing of Human Capital?

Over the late twentieth century, the financial sector grew rapidly, and attracted higher skilled workers at an increasing rate. Existing work attributes this to growth in financial sector productivity, which raised the marginal product of higher skilled workers. In this paper, we investigate the role of mispricing of financial assets (from asset bubbles) in artificially increasing returns to skill in the economy in the context of a two sector general equilibrium model. A speculative bubble arises from heterogeneous beliefs due to overconfidence and short-sales constraints, and investors perceive an option to resell the stock to others with even greater valuations. If the financial sector is relatively more intensive in the use of skilled workers, this can lead to an inefficiently large portion of these workers going to finance, and an inefficiently high skill-wage differential. Using data from the United States over the 1980 to 2012 period, we show that (1) the growth in asset bubbles were particularly important in increasing the perceived marginal product of higher-skilled workers; and (2) with the sharp retrenchment of the financial sector following the 2008 financial crisis, perceived marginal products and wages of higher skilled workers fell substantially. Our evidence shows that a large part of the “skill biased technical change” identified by earlier researchers actually represents a mispricing of human capital due to inefficiencies in the financial market.

    Posted by on Tuesday, October 7, 2008 at 01:53 PM in Economics, Technology | Permalink  TrackBack (0)  Comments (48)


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