This project involves research on two topics. The first project is an applied analysis of a theory of the growing wage premium between skilled and unskilled workers, with a focus on the interaction of the relative price of unskilled labor and the relative price of capital equipment. The basic theme in this project is that unskilled workers and capital equipment are good substitutes, and that capital equipment and skilled workers are relatively complementary. This theory suggests that declines in the price of unskilled labor will be tied to declines in the relative price of capital. A production function that explicitly distinguishes between capital structures and equipment, and between skilled and unskilled labor is developed, and the parameters of the production function are estimated using annual data from the CPS. The production function is then used to evaluate the extent to which the theory is consistent with historical variations in the wage premium. Preliminary results suggest that the rapid decline in the price of equipment, coupled with strong growth in the stock of capital, has been an important factor in growing wage inequality between skilled and unskilled labor over the past 30 years. The second topic is the development of a framework for evaluating dynamic equilibrium models, and the application of this framework to the analysis of recent models in macroeconomics and international economics. It is shown that the framework is a flexible and very useful tool for analyzing dynamic general equilibrium economies, as it is based on the realistic assumption that all models are misspecified. In addition, the framework is graphical, allowing the user to assess visually and quickly the dimensions on which the model performs well, it provides a common set of tools that can be used by researchers with different objectives and interests, and it develops new procedures for conducting inference in small samples. Extensions of the methodology, and applications to substantive economic models are also undertaken.
