Larry Katz of Harvard explains in an email to Greg Mankiw: “Most of my interview

Question

Larry Katz of Harvard explains in an email to Greg Mankiw: “Most of my interview with Greg Ip of the WSJ focused on how I substantially agreed with Eddie Lazear’s view [as past Chairman of Council of Economic Advisers to the President] that a major part of the growth of U.S. earnings inequality is driven by rising returns to skills and the interaction of sharp secular increases in skill demand combined with slower growth in the supply of skills (education) in the
U.S. in recent decades relative to the past.” (That’s quite a sentence!) Use a model to show these changes.

Explanation / Answer

If we are looking at supply and demand curves of skilled labor, this means the demand curve is moving to the right (increased demand for skilled labor) much more rapidly than the supply curve is moving to the right (increased supply). This drives up the price of skilled labor and thus gives skilled labor a major share of the wealth.

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