The UK and the US have experienced both rising skill premia and rising employment of
skilled workers since the 1980s. These trends are typically interpreted as concurrent shifts of
relative skill supplies and demands, and the demand shifts are attributed to skill-biased
technological change or changes in international trade patterns. If more skilled workers
demand more skill-intensive goods, then an exogenous increase in relative skill supplies will
also induce a shift in relative demand. This channel reduces the need to rely on technology
and trade to explain the patterns in the data. I illustrate this mechanism with a simple twosector
general equilibrium model. The empirical part demonstrates that in the UK more
educated and richer workers demand more skill-intensive goods. Calibration of the model
suggests that this induced demand shift can explain 3% of the total relative demand shift in
the UK between 1981 and 1997. The baseline model only explains between-industry shifts in
skill upgrading and wage inequality, while empirically, most of these changes took place
within industries. An extension of the model with different qualities of goods and labor can
also explain some of the within-industry changes.
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