Entry Costs, Task Variety, and Skill Flexibility: A Simple Theory of (Top) Income Skewness

This paper develops a simple model that provides a unified explanation for both an increase in below-top skewness and a much larger increase in within-top skewness of wage income distribution. It relies on a single mechanism based on the fixed costs of firm entry. A decrease in entry costs increases the variety of goods/tasks and thus the demand for higher-skilled workers who are more flexible in handling a variety of tasks, which increases both types of skewness. Differences in flexibility are modeled as differences in the fixed labor setup costs required to handle a given number of tasks. Our numerical experiments in a calibrated model show that a decrease in entry costs – entry deregulation – can be a quantitatively important source of both the increase in below-top skewness and the much larger increase in within-top skewness observed in the U.S. Moreover, the experiments imply that the observed differences in entry deregulation can cause significant differences in the top skewness across countries that have similar technological change. This can provide an answer to Piketty and Saez’s (2006) question: Why have top wages surged in English speaking countries in recent decades but not in continental Europe or Japan, which have gone through similar technological change?