The Effect of Product Demand on Inequality: Evidence from the United States and the United Kingdom

Using Consumer Expenditure Survey data this paper shows that more educated workers demand more high-skill-intensive services and, to a lesser extent, more very low-skill-intensive services (such as personal services). Additional evidence at the Metropolitan Statistical Area (MSA) level shows that this "education elasticity of demand" mechanism can explain part of the correlation between the share of college-educated workers in a city and the employment share of service industries. The parametrization of a simple model suggests that this induced demand shift can explain around 6.5 percent of the relative demand shift in the United States between 1984 and 2002. Similar results are provided for the United Kingdom. (JEL D12, J24, J31, L84)