Technological Acceleration, Skill Transferability and the Rise in Residual Inequality

This paper provides a quantitative theory for the recent rise in residual wage inequality consistent with the empirical observation that a sizeable part of this increase has a transitory nature, a feature that eludes standard models based on ex-ante heterogeneity in ability. An acceleration in the rate of quality-improvement of equipment, like the one observed from the early 70's, increases the productivity/quality di erentials across machines (jobs). In a frictional labor market, this force translates into higher wage dispersion even among ex-ante equal workers. With vintage-human capital, the acceleration reduces workers' capacity to transfer skills from old to new machines, generating a rise in the cross-sectional variance of skills, and therefore of wages. Through calibration, the paper shows that this mechanism can account for 30 percent of the surge in residual inequality in the U.S. economy (or for most of its transitory component). Two key implications of the theory {faster within job wage growth and larger wage losses upon displacement{ nd empirical support in the data. JEL Classification: E24, J31, O30.