"This paper analyses the relationship between wage inequality and labour market development. Relevant economic theories are ambiguous, just as public debates. We measure the effects of wage inequality, skill-biased and skill-neutral technology on hours worked, productivity and wages in a novel structural vector error correction framework identified by non-recursive long-run restrictions. Results show that skill-biased technology shocks reduce hours worked but increase inequality, productivity and wages. Structural inequality shocks also have a negative impact on hours worked, but additionally reduce productivity. We find relevant effects of inequality both above and below the median wage."

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