This paper links the rise of new industries populated by skill-intensive companies, andthe divergence in labour incomes between skills. Our model explains inequality by thefact that as the skilled workers move towards new Silicon-Valley type firms, thereduced complementarity between skilled and unskilled workers in the traditionalmanufacturing sectors lessens the productivity of the latter. In addition, knowledgeexternalities in the modern sector produce two equilibria in which either the modernsector dominates (and inequality between skills is high), or manufacturing dominates(inequality is low). We provide suggestive evidence consistent with our model.