Skilled Labor, Economic Transition and Income Differences: A Dynamic Approach

We propose a dynamic model of economic transition in which the supply constraint of skilled labor and skill premium are the focus. We argue that the constraint of skilled labor affect both the beginning date and the subsequent path of modern growth. The model matches the observed multiple paths of income inequality, such as "U-shaped", "inverted U-shaped" or "N-shaped" paths. Hence, the model requires faster technology change and more investment on skill formation to account for the current income differences relative to models that focus only on steady states.