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Wage Inequality in the U.S.: Capital-Skill Complementarity Vs. Skill-Biased Technological Change
Abstract
This paper provides a rigorous analysis of the sources of changes in the U.S. skill premium between 1965-1999. Over this period, the relative wages of skilled workers have increased signif- icantly despite the substantial growth in their relative supply. I present new empirical estimates of the impact of technology and various measures of capital in the demand for skilled labor, based on a translog production model with four (and Þve) factors and separate trends for the factor biases of technical change. I Þnd that capital-skill complementarity accounts for at most 40 percent of the rise in the skill premium, with factor nonneutral technological change and other unobservable factors accounting for most of the variation in the skill premium. Furthermore, the contribution of capital is decreasing over time while the technology effect is accelerating. I show that only a small fraction of equipment capital, information technology, is complementary to skilled labor. In fact, equipment excluding IT has narrowed the skilled wage gap. I also Þnd that skill-biased technological change takes the form of rising skilled labor efficiency and declining unskilled labor efficiency, with the latter becoming increasingly important over time. In addition, IT-using innovations are found to drive the skill premium down, which suggests that the total effect of IT is smaller than the one predicted by changing quantities alone. Finally, I Þnd that the data reject less ßexible speciÞcations in favor of the translog model.
... This does not preclude an interim phase in which high-level skills assist firms to experiment with new methods of work organisation that make best use of ICTs. However, as the new technologies become more established and ICT equipment becomes more user-friendly, fewer graduates are likely to be needed as ICTs become more complementary to workers with skills below graduate level ( Ruiz-Arranz, 2004). ...
... The lack of strong evidence of capital-skill complementarity has been taken as an argument for the claim that most of the increase in the skill premium in developed countries is explained by skill-biased technological change, as stated by Berman et al. (1994), Ruiz-Arranz (2003), and Balleer and van Rens (2013), among others. However, as shown by Krugman (1979), Acemoglu and Zilibotti (2001), and Tanaka (2006), among others, new technologies usually flourish in developed countries, while most developing countries adopt new technologies via capital accumulation. ...
We estimate the effect of capital composition on the size of capital-skill complementarity and the skill wage premium. Disaggregating the capital stock into different types according to technological content, we find that (1) capital is more of a q-complement to skilled labor than to unskilled labor, (2) the higher the technological component of capital, the larger the size of the relative q-complementarity between capital and skilled labor, and (3) replacing non-technological with technological capital may increase the skill wage premium by about 9 percent. Our results highlight that changes in capital composition matter for understanding changes in the skill wage premium.
... Chun's analysis implies that, as new technology is fully implemented, firms can replace high-wage, highly educated workers with lower-paid older workers who are not highly educated. Ruiz-Arranz (2004) provides evidence of a decreasing contribution of ICT capital-skill complementarity to the growth of the skill premium in the US since the 1980s. More recent studies on job polarization, for example Michaels et al. (2014) and Goos et al. (2014), argue that ICT has led to an increase in demand for highly educated workers at the expense of middle-educated workers but demand for low-educated workers has scarcely been affected. ...
Using panel data from nine European countries over the period 1970 to 2007, we examine the impact of information and communication technology (ICT) on the demand for older workers (aged 50 and over). We find evidence of a decrease in demand for older workers in the 1970s and 1980s. It can be argued that the impact of ICT on demand for older workers is skill-biased. However, the skill-biased demand for older workers is mainly reflected in the skill-biased changes in employment shares rather than relative wages. There is some evidence of a gradual deskilling of older workers. We find that labour market institutions such as the national minimum wage, social pacts on wage issues and union density mostly benefit skilled older workers, while coordination of wage setting, extension of collective agreements, social pacts on pensions and centralisation of wage bargaining can alleviate the adverse effects of skill-biased technological change.
Although wage inequality has evolved in advanced countries over recent decades, it remains unknown the extent to which changes in wage inequality and their differences across countries are attributable to specific capital and labor quantities. We examine this issue by estimating a sector-level production function extended to allow for capital–skill complementarity and factor-biased technological change using cross-country and cross-industry panel data. Our results indicate that most of the changes in the skill premium are attributable to the relative quantities of ICT equipment, skilled labor, and unskilled labor in the goods and service sectors of the majority of advanced countries.
On the framework of Chris and Viera (2005), this paper studies the capital-skill complementarity and its regional differences of China, firstly. It is shown that there exists evidence in favor of capital-skill complementarity on the full sample of China. When we test its regional differences, we find no evidence in favor of capital-skill complementarity in the central and western regions, but strong evidence in the eastern region. Further study finds that, the “capital-skill complementarity” exists threshold effect. Thus we argue that the original differences of capital-skill complementarity are relative to the economic development. These results reveal that, the low-income region (such as the central and western regions) tends to allocate their capital to complement their abundant of unskilled labor but not skilled labor, but the middle-income region (such as the eastern region) is just the opposite. In short, this paper provides some new evidences for the nonlinearity of capital–skill complementarity, and supports the viewpoint on “transitory phenomenon” of capital–skill complementarity.
Using a two-sector model with potentially different capital shares in each sector, I show that the evolution of the skill premium from 1970 to 2005 is consistent with skill-neutrality and even a mild unskill-bias of technological change. The main channel of adjustment to changes in labor supply is instead via the reallocation of capital. New investment occurs predominantly in the skilled sector, to the detriment of the unskilled sector of the economy. This result is shown both theoretically in a simple model and in a quantitative exercise using data on the US economy.
Given the widespread emphasis on the importance o f increasing workforce skills in order to enhance productivity performance, it is perhaps surprising that the evidence on the contribution of human capital to inter-country differences in productivity performance is still mixed. Yet this is certainly the case. This paper argues that two main reasons why some studies fail to find a strong role for skills in explaining relative productivity performance at national level are difficulties in measuring skills adequately and failure to take account of the mechanisms or channels of influence by which skills may exert indirect effects on productivity. Examples of such channels of influence include the complementarities of skills with other production inputs and the contributions made by skilled workers to knowledge generation and exchange and to innovation processes. However, the paper cautions that, in any single country, increases in measured skills may indeed have no effect on relative productivity performance unless those skills are well matched to employer requirements and are effectively utilised within firms and other organisations.
This paper uses non-parametric kernel methods to construct observation-specific elasticities of substitution for a balanced panel of 73 developed and developing countries to examine the capital-skill complementarity hypothesis. The exercise shows some support for capital-skill complementarity, but the strength of the evidence depends upon the definition of skilled labour and the elasticity of substitution measure being used. The added flexibility of the non-parametric procedure is also capable of uncover ing that the elasticities of substitution vary across countries, groups of countries and time periods. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2009.
This paper provides a unique cross-country comparative perspective on the impact of information and communication technology on the demand for skilled labour. It employs panel data for the US, the UK and France, comprising several skill categories for each country for the 1980s and 1990s. The paper considers the issue of whether skill bias is transitory or permanent both by considering changes through time and by dividing the highly skilled into IT specific and other occupations. The results indicate that the impact of technology on the demand for skilled labour is slowing down, at least in the US, supporting a transitory interpretation.
This paper uses a novel dataset to test the capital–skill complementarity hypothesis in a cross-section of countries. It is shown that for the full sample there exists evidence in favor of the hypothesis. When we arbitrarily split the full sample into OECD and non-OECD countries, we find no evidence in favor of the hypothesis for the OECD subsample, but strong evidence for the non-OECD subsample. When we use Hansen’s [Econometrica 68 (2000) P. 576] endogenous threshold methodology we find that initial literacy rates and initial per capita output are threshold variables that can cluster countries into three distinct regimes that obey different statistical models. In particular, the regime with moderate initial per capita income but low initial education exhibits substantially higher capital–skill complementarity than the regime with low income and low education and the regime with high education. This cross-country nonlinearity in capital–skill complementarity is consistent with the time-series nonlinearity found by Goldin and Katz [Quarterly Journal of Economics 113 (1998) 693] using U.S. manufacturing data, and promotes the view that the phenomenon maybe a transitory one. Copyright Springer Science+Business Media, Inc. 2005
In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labour market. A key focus is on the rise of US wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase in unemployment and an increased labour share of income, variables that remained stable in the US We hypothesize that these changes in labour market inequalities can be accounted for by the wave of capital-embodied technological change, which we also document. We propose a variety of mechanisms based on how technology increases the returns to education, ability, experience, and ‘luck’ in the labour market. We also discuss how the wage distribution may have been indirectly influenced by technical change through changes in certain aspects of the organization of work, such as the hierarchical structure of firms, the extent of unionization, and the degree of centralization of bargaining. To account for the US-Europe differences, we use a theory based on institutional differences between the United States and Europe, along with a common acceleration of technical change. Finally, we briefly comment on the implications of labour market inequalities for welfare and for economic policy.
We explore two channels through which increases in the rate of investment-specific technological change can lead to decreases in measured productivity growth. The first channel is learning; with an increase in the rate of adoption more resources are devoted to new technologies where experience is low. As a result, labor productivity and TFP growth fall temporarily. Second, if the unmeasured quality of final outputs depends significantly on capital input, then declines in productivity growth will be recorded as the growth rate of capital goes up. We document the recent productivity slowdown in the United States and elsewhere and discuss evidence suggesting that an increase in the rate of investment-specific technological change may have occurred at about the same time as the slowdown began. We then use a simple, parameterized vintage capital model in order to gauge the potential importance of this phenomenon for productivity measurements.
This paper provides evidence that the decline in the real value of the minimum wage and in the rate of unionization account for a significant share of the increase in wage inequality in the United States between 1979 and 1988. The role of the minimum wage is particularly important for women, while deunionization has the largest impact on men. The authors develop a semiparametric procedure that applies kernel density methods to appropriately weighted samples. The procedure provides a visually clear representation of where in the density of wages institutional and labor market forces exert the greatest impact. Copyright 1996 by The Econometric Society.
This paper investigates the shift in demand towards skilled labor in U.S. manufacturing. Between 1979 and 1989. employment of production workers in manufacturing dropped by 2.2 mil1ion or 15 percent while employment of non-production workers rose by 3 percent. A decomposition of changing employment patterns in each of 450 industries reveals that the defense buildup and trade deficits can account for only a small part of the shift in demand towards non-production workers. We conclude that production labor-saving technological change is the most likely explanation for the shift in demand towards non-production workers since the shift is mostly due to changes in labor demand within industries rather than reallocation of employment towards industries with higher shares of skilled labor. Strong correlations between within-industry skil1 upgrading and both increased investment in computers on the one hand and increased investment in R&D on the other provide further evidence for production labor saving technological change.
