Essays on wealth and human capital inequality

Schroeder, Max (2023) Essays on wealth and human capital inequality. PhD thesis, University of Glasgow.

Abstract

This thesis studies wealth and human capital inequality, with an emphasis on the interaction of the two inequalities with each other and with large changes in the aggregate environment of the economy, such as technological change or large economy-wide shocks.

The first chapter proposes a model to study the effect of differentiated, cognitive skillbiased, technological change (CBTC) on income and wealth inequality. Recent studies have documented rising income inequality over the past decades and linked this phenomenon to the increasing adoption of computerised equipment and technologies. Other work relates changes in idiosyncratic risk faced by households to changes in the distribution of wealth. In this chapter I try and connect both literatures, to assess the effect of technological change on wealth inequality mediated by changes to income risk. For this, I combine elements of the "Task-Skill" framework with a heterogenous agent incomplete market model. The model includes a production environment that accounts for differentiated skill demand on the firm's side and multidimensional skill supply on the worker's side. Using measures of cognitive and non-cognitive skills from a comprehensive panel dataset for the UK (Understanding Society), I calibrate the model with appropriate micro-estimates. The calibrated model captures relevant features of the income process and wealth distribution observed in the data. In contrast to the standard approach of approximating income risk through an AR(1) process, the model allows income risk to respond appropriately to changes in the demand for cognitive skills. I then use the model to assess the impact of cognitive skill-biased technological change in the UK over the period 1980 - 2016. The model suggests that CBTC can account for the bulk of increases in labour income inequality observed over that period and is generally consistent with stylized facts about changes to wealth inequality.

The second chapter studies the complex interactions that exist between the distributions of wealth and human capital amongst working-age individuals. In this chapter, I develop a general equilibrium incomplete market model with endogenous wealth and human capital to analyse the interactions between these two factors. Workers choose between investing in a safe asset or augmenting their stock of knowledge and skills (human capital), which makes them more productive in the labour market. Human capital, however, is risky since it is not equally valuable in every employment situation. I calibrate the model to the UK economy in the pre-Covid-19 period and analyse the interaction of wealth and human capital in the stationary equilibrium. I find that there are important non-linearities in human capital investments, with workers with low levels of wealth investing considerably less in accumulating human capital than their counterparts with more wealth. I then analyse the economic dynamics of the distribution of human capital in the aftermath of an unexpected economic shock, showing that wealth poorer households are more exposed to these shocks, implying that the distribution of wealth matters for the recovery of the economy following recessions. These results provide a potential explanation for the persistently low productivity observed after the 2008 recession in the UK, highlighting the role of worsening wealth inequality as generating endogenous barriers for lower wealth individuals to improve their working skills. Finally, I assess the impact of the Covid-19 pandemic and associated support measures in the UK. The model predicts that the UK economy will likely suffer a significant reduction in human capital in the aftermath of the Covid-19 pandemic, but targeted policy action has helped to reduce the impact of the crisis particularly for low-wealth households.

The third chapter studies the change in the multidimensional skill supply of university graduates in the UK. University graduates have highly di§erentiated skills, both compared to the general population and other graduates. Di§erences arise from di§erences in background, course of study and individual aptitudes and interests. In this chapter, I study the distribution of these different skills, investigating what types of skills graduates have, and how these vary between and within broadly defined subject groups as well as across time. To this end, I develop a model of occupational choice and wage determination for university graduates in the UK. Graduates differ with regard to two types of general skills: mathematical/technical and verbal/organisatorial, which are used with different intensities by different occupations. I structurally estimate the model to find evidence of changing multivariate skill distributions over time. I find that between 1994 and 2019, the typical graduates' level of mathematical skills increased by 140% while verbal skills decreased by close to a third. Looking closer at 5 different major subject categories, I find that this trend is driven by increasing specialisation for STEM and Business & Economics degrees and increasing generalisation among Arts & Humanities and Other Subjects. For most graduates mathematical/technical skills have become the single biggest contributing factor to their earnings, making up around 50% of their hourly wage compared to 27% in the mid-90s. Counterfactual simulations suggest that in the absence of changes to the subject-specifc skill distributions, mean wages would be up to 8% lower, while wage inequality would be up to 5% larger. The results suggest that graduate skill supply has adjusted to changing labour market requirements.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Subjects: H Social Sciences > HB Economic Theory
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
• Supervisor's Name: Angelopoulos, Professor Konstantinos and Malley, Professor Jim
• Date of Award: 2023
• Depositing User: Theses Team
• Unique ID: glathesis:2023-83736
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 24 Jul 2023 10:23
• Last Modified: 24 Jul 2023 10:47
• Thesis DOI: 10.5525/gla.thesis.83736
• URI: https://theses.gla.ac.uk/id/eprint/83736

Related URLs

• https://maxschroeder.uk/research/