Distributional consequences of neutral shocks to economic activity in a model with efficiency wages and overeducation

This paper shows that the existence and persistence of `overeducation' can be explained by a simple extension of the efficiency wage model. When calibrated to fit the amounts of overeducation found in most empirical studies, the model implies that both the relative wage and the relative employment rate of high-skill workers will depend inversely on the aggregate level of activity. The model may help explain the patterns of rising wage inequality that have been observed in many countries since the early 1970s.