Unbundling Labor

Why is there so much wage inequality within occupations? Why has the overall level of within-occupation wage inequality risen? Why is the rise concentrated in cognitive-intensive occupations, while inequality has fallen in manual-intensive ones? To answer these questions we develop a general equilibrium model with heterogeneous workers who supply multiple skills jointly, as an indivisible bundle. This bundling friction allows a given skill to be priced differently in different occupations. We find in US data that differences in skill prices, not worker composition, explain why within-occupation inequality is higher in more cognitively intensive occupations and account for about a third of the rise in within-occupation inequality from 1980 to 2010. We show that a uniform increase in the productivity of cognitive skill can drive inequality up in cognitive-intensive occupations and down in manual ones, just as in the data.