Consumption Upgrading and Wage Inequality

This paper proposes a unified analysis incorporating both consumer preferences and production technology to explain the secular rise of wage inequality in the United States. Utilizing household consumption data with detailed industry employment data, I document that as incomes grow, households spend more on skill-intensive goods and services as a fraction of their total consumption. This implies that economic growth will result in greater demand for skilled labor. The paper then develops a multi-industry general equilibrium model featuring non-homothetic demand, industry-specific production technology and capital-skill complementarity. I estimate that capital equipment substitutes for low-skill labor and complements high-skill labor, and I quantitatively evaluate the sources driving the rise in the skill wage premium from 1982 to 2019, with a focus on the income channel. The results indicate that while capital accumulation is the primary driver of the skill premium increase, the income-driven consumption channel operating through skill-neutral productivity growth contributes to 13.4% of the overall rise in the skill premium.