Dual labor markets, changes in the stock of knowledge and earnings distributio

Why did the wage distribution in developed economies become more unequal during the 1980s and 1990s? This dissertation examines one possible cause, namely unexpected increases in the returns to educational investments. We develop a simple two-sector model of an urban economy, and show that, given myopic expectations regarding the increase in the knowledge stock, periodic worsening of the earnings distribution inevitably occur, even in a world where workers are all equal in ability and perfectly free to make choices about their educational investments. However, while distribution has widened, our model shows this to only be a temporary phenomenon, unless the knowledge base increases again. We then extend the model by introducing a land market and in-migration from rural areas. We show that following in-migration, distribution is further widened. Historical trends in post-war earnings distribution in the United States support the conclusions of the model. We further test the results of the theory using data from the 1980 and 1990 United States Census, in particular focusing on the interaction of in-migration and industrial structure, and find that the main hypotheses of the model are by and large supported.