Task wage gaps and inequality

Abstract: This paper develops and tests a model of equilibrium task supply where such tasks are the proximate inputs to production. In the model, ex ante identical workers choose task supply and identical, competitive firms choose task demand. The model predicts that changes in task supply adjustment costs drive changes in the income distribution by creating a wedge between task wages. The key assumption of the model --- that task adjustment costs are economically significant --- is validated using methods of program evaluation from the labor literature. That quasi-experimental evidence indicates workers who are forced to make the median change in their task supply lose on average 7 log points of annual earnings over their lifetimes. Working through the mechanisms of this empirically validated model, increased task adjustment costs can explain much of the recent rise in income inequality.

UPDATE 12/9/2010: I've completely reworked section 5. I now test that the optimizing condition, implied by the model, holds in the long-run using a error correction model framework. I also rewrote the second half of section 6 where I discuss how my model performs relative to the "canonical" model of Katz/Murphy.

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