Product Demand Shifts and Wage Inequality

The US and the UK have experienced both rising skill premia and rising employment of skilled workers since the 1980s. These trends are typically attributed to skill-biased technical change or trade. If more skilled workers demand more skill-intensive goods, then an exogenous increase in relative skill supply will also induce a shift in relative skill demand. This channel reduces the need to rely on technology and trade to explain the patterns in the data. I illustrate this mechanism with a simple two-sector general equi-librium model with non-homothetic preferences. This paper demonstrates that in the US and in the UK more educated and richer workers demand both more very low skill-intensive services (such as cleaning and personal services) and very high skill-intensive services (such as education and profes-sional services). A parametrization of the model suggests that this induce