9511275 Stokey The goal of this research is to explore some of the links between technological change, investments in human and physical capital, and the distribution of income. The first part of the project is motivated by the results of recent empirical work that shows that the degree of intergenerational mobility in the income distribution is far lower than earlier studies had suggested. This project will analyze together the important channels for the persistence of inequality. Pervious theoretical models have treated these channels one at a time ald neglected altogether one important channel. The goal of this part of the project is to develop a theoretically tractable model that can be calibrated to U.S. data. Understanding the mechanisms through which persistence is generated is critical for debates about the efficacy of various policy measures in raising the earnings prospects of children whose family backgrounds alone give little reason for optimism. For example, to calculate the benefits of increased public expenditures on educational investments in children from low-income families, one needs to know how much higher investments are likely to raise the child's eventual earnings, to what extent higher public expenditures are likely to be offset by lower private expenditures, and the extent to which any benefits to the child will also affect the child's own descendants. The second part of the project is motivated by the evidence of a dramatic increase in the wage premium for skilled labor in the U.S. in the 1980s due to skill biased technological change. The experience of the 1980s was not unique, however: the U.S. has seen several extended periods of expansion and compression in the skill premium during this century. A stochastic dynamic general equilibrium model will be used to study such periods of expansion and compression as equilibrium responses to stochastic, skill biased, technological change.
