A Multisector Perspective on Wage Stagnation

Low-skill workers are concentrated in sectors that experience fast productivity growth and yet their wages have been stagnating. A multisector perspective is crucial to understand this stagnation as it is not due to an overall stagnation in the marginal product of low-skill workers but a labour reallocation into sectors with slower growth. We show this in a two-sector model where the faster productivity growth causes a fall in the relative price of the low-skill intensive output, which consists of capital and a consumption good that is a complement to the high-skill intensive output. When calibrated to the U.S., the model accounts for a substantial part of the low-skill wage stagnation and its divergence from aggregate productivity during 1980-2010.