Accounting for the Evolution of U.S. Wage InequalityThe usual disclaimer applies

A large literature has documented an increase of U.S. wage inequality over the past several decades. This paper asks how far one can go towards accounting for the evolution of several measures of U.S. wage inequality based on a stochastic human capital model. The model features four school levels with distinct labor types and skill prices and Ben-Porath style human capital accumulation on the job. Four exogenous changes generate rising wage inequality in the model economy: skill-biased technical change, demographic change, rising schooling, and increasing shock variances. I find that human capital theory can account for almost the entire increase of various dispersion statistics, such as the standard deviation of log wages, the 90/50 wage ratio, and the age-specific college wage premium. The model also accounts for the changing returns to experience over time. Counterfactual experiments identify the proximate causes of rising wage inequality as well as their implications for lifetime inequality. JEL: D31 Personal Income, Wealth, and Their Distributions. E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital. I24 Education and Inequality. J24 Human Capital; Skills; Occupational Choice; Labor Productivity. J31 Wage Level and Structure; Wage Differentials.