Working Paper: CEPR ID: DP1707
Authors: Daron Acemoglu
Abstract: This paper considers an economy where skilled and unskilled workers use different technologies. The rate of improvement of each technology is determined by a profit-maximizing R&D sector. When there is a high proportion of skilled workers in the labour-force, the market for skill-complementary technologies is larger and more effort will be spent in upgrading the productivity of skilled workers. An implication of this theory is that when the relative supply of skilled workers increases exogenously, the skill premium decreases in the short run, but then increases, possibly even above its initial value, because the larger market for skill-complementary technologies has changed the direction of technical change. This suggests that the rapid increase in the proportion of college graduates in the US labour-force may have been causal in both the decline in the college premium during the 1970s and the large increase in inequality during the 1980s. The paper also derives implications of directed technical change for residual wage inequality and shows that calculations of the impact of international trade on inequality that ignore the change in the direction of technical progress may be misleading.
Keywords: endogenous technical change; relative supply of skill; returns to education; skill-biased technological change; skill-technology complementarity; wage inequality
JEL Codes: J31; O14; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in the proportion of skilled workers (J24) | Decrease in the skill premium (F66) |
| Increase in the proportion of skilled workers (J24) | Development of skill-complementary technologies (O49) |
| Development of skill-complementary technologies (O49) | Increase in the skill premium (J24) |
| Increase in the proportion of skilled workers (J24) | Increase in the skill premium (J24) |
| Increase in the proportion of skilled workers (J24) | Wage inequality (J31) |
| Development of skill-complementary technologies (O49) | Wage inequality (J31) |
| Ignoring change in direction of technical progress (O33) | Misleading conclusions about wage inequality (J70) |