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Entry Costs, Task Variety, and Skill Flexibility: A Simple Theory of (Top) Income Skewness

Manoj Atolia and Yoshinori Kurokawa

Abstract

This paper develops a simple model that provides a unified explanation for both an increase in below-top skewness and a much larger increase in within-top skewness of wage income distribution. It relies on a single mechanism based on the fixed costs of firm entry. A decrease in entry costs increases the variety of goods/tasks and thus the demand for higher-skilled workers who are more flexible in handling a variety of tasks, which increases both types of skewness. Differences in flexibility are modeled as differences in the fixed labor setup costs required to handle a given number of tasks. Our numerical experiments in a calibrated model show that a decrease in entry costs – entry deregulation – can be a quantitatively important source of both the increase in below-top skewness and the much larger increase in within-top skewness observed in the U.S. Moreover, the experiments imply that the observed differences in entry deregulation can cause significant differences in the top skewness across countries that have similar technological change. This can provide an answer to Piketty and Saez’s (2006) question: Why have top wages surged in English speaking countries in recent decades but not in continental Europe or Japan, which have gone through similar technological change?

JEL Classification: D31; D33; D63; J31; F12; L51

Corresponding author: Manoj Atolia, Department of Economics, Florida State University, Tallahassee, FL 32306, USA, E-mail:

Acknowledgments

We are very grateful to Timothy Kehoe for his suggestions and advice and to the editor, an anonymous referee, Jim Anderson, Henrique Basso, Luca Bossi, Serguey Braguinsky, Daphne Chen, Hiroshi Fujiki, Ippei Fujiwara, Rahul Giri, Nobuyuki Hanaki, Naohisa Hirakata, Hiro Ishise, Mitsuru Katagiri, Munechika Katayama, Sagiri Kitao, Keiichiro Kobayashi, Takushi Kurozumi, Ben Li, Noriaki Matsushima, Matthew Mitchell, Hiroaki Miyamoto, Robert Murphy, Ryo Nakajima, Masao Ogaki, Akira Ohtani, Hideo Owan, Ariell Reshef, Roberto Samaniego, Felipe Schwartzman, Carol Scotese, Yoshimasa Shirai, Juliana Yu Sun, Pin Sun, Robert Tamura, Rongsheng Tang, Takayuki Tsuruga, Mike Veall, Daniel Westbrook, Tomoo Yoshida, and participants in seminars/conferences at Boston College, the Bank of Japan, Kyoto, Osaka, Keio, the Midwest Macro Meetings, the JEA Meeting, the WEAI Biennial Pacific Rim Conference, the NASM of the Econometric Society, and the AMES for their comments and help. The previous titles of this paper were “Task Variety and Skill Flexibility: A Simple Unified Theory of Between- and Within-group Inequality” and “Fixed Costs, Task Variety, and Skill Flexibility: A Simple Unified Theory of Below- and Within-top Inequality.”

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Received: 2019-10-31
Accepted: 2020-07-15
Published Online: 2020-08-25

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