Can the information technology revolution explain the incidence of co-movement of skill premium and stock prices?

We investigate for a long-run relationship between skill premium and stock prices by using the panel cointegration tests for six OECD countries. A cointegrating relationship is observed in the panel data for the period 1984-2005. The evidence for co-movement of skill premium and stock prices is also found in the US data. Next, we develop a three-sector model to explain this co-movement. We demonstrate that technological revolution not only widens the skilled-unskilled wage gap, but also increases firms' profit and, thus, higher stock prices. Finally, we calibrate our model to the US data for the Information Technology revolution that happened in the 1980s and demonstrate that our model can moderately explain the data. Our model concludes that, unless any further revolutionary surge in productivity of the R&D sector happens, the skill premium will augment no more and stock prices will register no further unusual growth.