The Wage Premium Puzzle and the Quality of Human Capital


Milton H. Marquis

Wuttipan Tantivong

Bharat Trehan

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2011-06 | February 1, 2011

The wage premium for high-skilled workers in the United States, measured as the ratio of the 90th-to-10th percentiles from the wage distribution, increased by 20 percent from the 1970s to the late 1980s. A large literature has emerged to explain this phenomenon. A leading explanation is that skill-biased technological change (SBTC) increased the demand for skilled labor relative to unskilled labor. In a calibrated vintage capital model with heterogeneous labor, this paper examines whether SBTC is likely to have been a major factor in driving up the wage premium. Our results suggest that the contribution of SBTC is very small, accounting for about 1/20th of the observed increase. By contrast, a gradual and very modest shift in the distribution of human capital across workers can easily account for the large observed increase in wage inequality.

Article Citation

Trehan, Bharat, Milton H. Marquis, and Wuttipan Tantivong. 2011. “The Wage Premium Puzzle and the Quality of Human Capital,” Federal Reserve Bank of San Francisco Working Paper 2011-06. Available at