Trading Up and the Skill Premium
We study the impact on the skill premium of increases in the quality of goods consumed by households (“trading up”). Our empirical work shows that high- quality goods are more intensive in skilled labor than low-quality goods and that household spending on high-quality goods rises with income. We propose a model consistent with these facts. This model accounts for the past rise in the skill premium with more plausible rates of skill-biased technical change than those required by the canonical model. It also implies that an expansion of the skilled labor force reduces the skill premium by much less than in the canonical model.
We thank Daron Acemoglu, Gadi Barlevy, Carlos Burga, Martin Eichenbaum, Berthold Herrendorf, Eric Hurst, Ben Moll, Jonathan Vogel, and Carlo Zanella for their comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.