Endogenous Growth, Skill-Biased Technical Change and Wage Inequality

In recent literature skill-biased technical change has been viewed as a ma-jor cause for wage inequality. Some modelling and presentation of stylized facts have been undertaken for U.S. time series data. A preliminary study of wage inequality in a model with knowledge as input in an aggregate pro-duction function has been presented by Murphy, Riddell and Romer (1998). Although some important forces determining wage inequality are widely ac-cepted we know little about the quantitative impact of each source and dif-ferences across countries. We present a growth model of the Romer type with innovation based technical change and two skill groups where the growth of knowledge, the relative supply of the two skill groups, externalities and substi-tution effects among the two groups are the driving forces for wage inequality. We undertake estimates for U.S. time series data and contrast those estimates with results from some European countries. In particular, we compare param-eter estimations for U.S. and German time series data. The paper concludes that there is less wage inequality across skills in Europe in contrast to the U.S. on the macroeconomic level. But, considering disaggregated data we observe some increase in inequality for Germany, too. Although our model reveals important variables for the explanation of wage inequality there may, however, also be other factors, such as trade unions, which have impacted the wage spread