Skill-Biased Inequality, Market Luck, and Redistributive Preferences

Talk by Jeffrey Yusof (UZH).

Structural transformations caused by globalization and technological change substantially change the rewards of different skills in the labor market. The shift in the valuation of skills and the resulting skill-biased inequality are, therefore, often determined by external market forces, a phenomenon we refer to as market luck. In meritocratic societies, inequalities are typically considered justifiable only when they stem from individual effort and not from factors beyond an individual's control. This raises the question of whether individuals perceive inequalities arising from market luck as fair. To answer this question, we design an experiment where inequality between workers with different skills emerges because they are matched with a buyer who requires a specific skill. We find that impartial spectators tend to accept inequalities that arise from such demand shocks, even if there are no discernible differences in effort, and the source of inequality is entirely beyond the workers’ control. We show that this effect is driven by the fact that lucky workers generate a profit for a buyer. Further evidence suggests that our results are externally valid, as our experimental measure of inequality acceptance predicts support for real-world welfare policies, and the results of a complementary survey experiment confirm that our findings extend to real-life scenarios. In conclusion, our paper suggests that the conventional dichotomy of effort versus luck falls short of explaining redistributive preferences in contexts where markets generate and perpetuate inequality.