The Labor Market and Growth Implications of Skill Distribution: A Dynamic General Equilibrium Model with Skill Heterogeneity

This paper develops a dynamic general equilibrium model which explicitly incorporates the skill distribution of heterogeneous workers. Workers are distributed heterogeneously in their individual skill level and can be endogenously sorted into different tasks using different technologies. In doing so, we study in depth the labor market and growth implications of the changes in skill distribution. Specifically, we consider two changes in the skill distribution in a given population, (i) the increased density in the upper tail (skill upgrading), and (ii) the increased density both in the lower and upper tails (skill polarization). It is shown that, though the labor market implications for individual workers are likely to be largely different and complex (skill polarization even leads to nonlinear labor market changes), both changes in the skill distribution may increase steady-state real investment and enhance growth so that all workers gain with time.