Income inequality: The consequences of skill-upgrading when firms have hierarchical organisational structures

During the last three decades, most developed countries have experienced increasing income inequality. Using Danish register data from 1992 to 2007 for all private-sector employees, we confirm that income inequality has increased in Denmark. We also observe an increase in the relative employment of highly-educated individuals, as well as differential income growth rates across employee subgroups where, in particular, managers experienced significant real income progression. We use an equilibrium search framework with on-the-job search to derive the income distribution. In this model we can determine the management and education premia. We can also show that when our model is exposed to skill-upgrading it is capable of producing income dynamics similar to those observed in the Danish income distribution. (JEL J3, J6, M5)