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

Wage inequality in the United States has increased, and many suspect that the main causes are changes in technology, international competition, and factor supplies. Our empirical model estimates 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 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.