Precautionary demand for education, inequality, and technological progress

This paper offers an explanation for the evolution of wage inequality withi n and between industries and education groups over the past several decades . The model is based on the disproportionate depreciation of technology-spe cific skills versus general skills due to technological progress, which occ urs randomly across sectors. Consistent with empirical evidence, the model predicts that increasing randomness is the primary source of inequality gro wth within uneducated workers, whereas inequality growth within educated wo rkers is determined more by changes in the composition and return to abilit y. Increasing randomness generates a "precautionary" demand for education, which we show empirically to be significant.