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This paper investigates how much of the difference in wage distributions is related to differences in skill … countries that have more compressed (dispersed) wage structures simultaneously have more compressed (dispersed) skill structures … as well, and according to many economists, variations in skill inequality can explain variations in wage inequality …
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We extend the Lucas' 1988 model introducing two classes of agents with heterogeneous skills, discount factors and initial human capital endowments. We consider two regimes according to the planner's political constraints. In the first regime, that we call meritocracy, the planner faces...
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