Wage Inequality and Cognitive Skills: Reopening the Debate

Inequality in the United States is high by international standards, and keeps rising. This is likely to bring significant social as well as economic costs, including lower growth. In this paper, we use the Survey of Adult Skills (PIAAC) to revisit the debate on the relative importance of skills in explaining international differences in wage inequality. While simple decomposition exercises suggest that skills only play a minor role, demand and supply analysis indicates that the relatively low supply of, but high demand for, high-skilled workers in the United States compared to other countries could explain 29 percent of the higher top-end wage inequality observed in the United States.