Professional Documents
Culture Documents
episodes. For example, there were already the idea that technological advances fa-
signs of significant technology-skill vor more skilled workers is a twentieth-
complementarity in the 1910s. Claudia century phenomenon. In nineteenth-
Goldin and Lawrence Katz (1998) argue century Britain, skilled artisans
that the spread of batch and continuous- destroyed weaving, spinning, and
process methods of production in- threshing machines during the Luddite
creased the demand for skills. They and Captain Swing riots, in the belief
add, “. . . the switch to electricity from that the new machines would make
steam and water-power energy sources their skills redundant. They were right:
was reinforcing because it reduced the the artisan shop was replaced by the
demand for unskilled manual workers factory and later by interchangeable
in many hauling, conveying, and assem- parts and the assembly line (e.g., John
bly tasks” (p. 695). Over this period, James and Jonathan Skinner 1985;
capital-intensive industries increased Goldin and Katz 1998). Products pre-
the demand for skills considerably (see viously manufactured by skilled artisans
Goldin and Katz 1998, table 3), and the started to be produced in factories by
scope of these industries expanded with workers with relatively few skills, and
the sharp fall in the price of electricity many previously complex tasks were
(see, for example, Arthur Woolf 1984, simplified, reducing the demand for
p. 178). The rapid increase in the im- skilled workers. 2 Joel Mokyr (1990, p.
portance of white-collar and clerical oc- 137) describes this process vividly:
cupations gave another boost to the de- First in firearms, then in clocks, pumps,
mand for skills. Generalizing from the locks, mechanical reapers, typewriters, sew-
experience of the 1920s, Harry Jerome ing machines, and eventually in engines and
(1934, p. 402) argued that “. . . in the bicycles, interchangeable parts technology
future . . . there is considerable reason proved superior and replaced the skilled
artisans working with chisel and file.
to believe that the effect of further
[mechanization] will be to raise the 2 In the absence of detailed econometric evi-
average skill required.” dence, it is difficult to generalize from the histori-
The early twentieth-century evidence cal examples and conclude that technical change
was so powerful that Zvi Griliches was definitely skill-replacing during the nine-
teenth century. Still, the only econometric evi-
(1969) suggested capital and skills are dence that I am aware of supports this view. Using
intrinsically complementary. Richard the 1850 Census of Manufacturers, James and
Nelson and Edmund Phelps (1967), Skinner (1985) find that there was more rapid sub-
stitution of capital for skilled workers than un-
Finis Welch (1970), Theodore Schultz skilled workers. It can also be argued that techni-
(1975), and Jan Tinbergen (1975) also cal change always increases the demand for
argued that technological developments “skills,” and the artisans who were hurt as a result
of new technology were not “skilled” since they
increase the demand for skills. Events lacked the flexibility to adapt to the required
since then support this notion. Personal changes. This argument is not totally convincing,
computers, computer-assisted produc- since the artisans earned considerably more than
other laborers (for example, James and Skinner
tion techniques, and robotics appear to 1985 report over 60 percent wage differentials for
complement skilled workers, replacing building and printing workers relative to laborers
many labor-intensive tasks. In this light, in the 1850s). So the artisans possessed skills that
were being rewarded by the market, and the stan-
it is perhaps natural to view the in- dardization of the production process destroyed
crease in inequality over the past sev- these rewards. On the other hand, it has to be
eral decades as a direct consequence of noted that many of the skill-replacing technologies
of the nineteenth century may have also increased
technical change. the demand for engineers and managers (see, e.g.,
Although the consensus is now broad, Goldin and Katz 1998).
Acemoglu: Technical Change, Inequality, and the Labor Market 9
Interchangeable parts were in fact very an acceleration in skill bias during the
much designed to be skill-replacing past few decades appears to be the main
(unskill-biased). Eli Whitney, a pioneer cause of the increase in inequality.
of interchangeable parts, described the • We can understand the behavior of
objective of this technology as: technical change by recognizing that
the development and use of technol-
. . . to substitute correct and effective op-
erations of machinery for the skill of the art-
ogy is, at least in part, a response to
ist which is acquired only by long practice profit incentives.3 When developing
and experience; a species of skill which is not skill-biased techniques is more profit-
possessed in this country to any considerable able, new technology will tend to be
extent. . . . (quoted in H. J. Habakkuk 1962, skill-biased. I suggest that the early
p. 22)
nineteenth century was characterized
The experience of the nineteenth and by skill-replacing developments be-
early twentieth centuries led Harry cause the increased supply of unskilled
Braverman (1974) and Stephen Marglin workers in the English cities (resulting
(1974) to argue that technical change from migration from rural areas and
was “deskilling”—a major purpose of from Ireland) made the introduction
technical change was to expand the divi- of these technologies profitable. In
sion of labor and simplify tasks pre- contrast, the twentieth century has
viously performed by artisans by break- been characterized by skill-biased
ing them into smaller, less skill-requiring technical change because the rapid in-
pieces. Braverman (1974, p. 113), for ex- crease in the supply of skilled workers
ample, suggested that the first principle has induced the development of skill-
of management and production tech- complementary technologies. The re-
niques of the period was “dissociation of cent acceleration in skill-biased tech-
the labor process from skills of the work- nical change is in turn likely to have
ers. The labor process is to be rendered been a response to the rapid increase
independent of craft, tradition, and the in the supply of skills during the past
workers’ knowledge.” several decades. However, I also argue
A longer view therefore suggests that that despite the acceleration in skill
technological advances may not have bias, we are most likely not in the
always increased the demand for skills. midst of a “technological revolution”;
In fact, most early nineteenth-century what has changed is not necessarily
innovations appear to have replaced the overall rate of progress, but the
skilled workers and expanded tasks per- types of technologies that are being
formed by the unskilled. But then, why developed.
have technological advances been skill-
biased in the twentieth century? And, 3 Precedents of this approach include Jacob
are technological changes the major cause Schmookler (1966), who emphasized demand pull
and the extent of the market as key determinants
of the recent increase in inequality? of innovations; the endogenous growth theory,
This essay attempts to answer these e.g., Paul Romer (1990), Gene Grossman and El-
questions. It has two main theses: hanan Helpman (1991), and Philippe Aghion and
Peter Howitt (1992); the induced innovation the-
ory, including Syed Ahmad (1965), Charles Ken-
• The behavior of wages and returns to nedy (1964), Paul Samuelson (1970), Yujiro
schooling indicates that technical Hayami and Vernon Ruttan (1970), and Paul
change has been skill-biased during the David (1975); and recent work including my own,
Acemoglu (1998, 1999b, 2000), Acemoglu and
past sixty years and probably for most Fabrizio Zilibotti (1999), and Michael Kiley
of the twentieth century. Furthermore, (1999).
10 Journal of Economic Literature, Vol. XL (March 2002)
was relatively stable before the 1970s, ior of entrepreneurs driven by a variety
because the rate of skill accumulation of nonprofit motives. Demand for skills
in the U.S. economy was as rapid increased faster during the past thirty
as the constant pace of skill-biased years, this approach would maintain,
technical change (e.g., Katz and Kevin because of a technological revolution led
Murphy 1992; Murphy, Craig Riddell, by the microchip, personal computers,
and Paul Romer 1998; David Card and and the internet. 6 New technologies of
Thomas Lemieux 2000). The recent in- the early nineteenth century were skill-
crease in inequality is then explained, replacing (unskill-biased) because the
not by a major technological change, technological frontier then only en-
but by a decline in the growth rate of abled the invention of skill-replacing
the supply of skills. The second possible techniques.
answer comes from the acceleration hy- Nevertheless, there are several prob-
pothesis, which maintains that there has lems with this approach. First, although
been an acceleration in skill bias begin- a number of papers, including Green-
ning in the 1970s or the 1980s. Accord- wood and Yorukoglu (1997), Andres
ing to this hypothesis, there is a dis- Hornstein and Krusell (1997), and Ga-
continuity in the growth rate of the lor and Moav (2000), show that rapid
demand for skills. The most popular technical change may lead to slower to-
version of this hypothesis claims that tal factor productivity (TFP) growth,
there has been a notable acceleration in the slow rates of TFP and output
the skill bias of technology, driven by growth of the past several decades are
advances in information technology, or difficult to reconcile with a technologi-
perhaps a “Third Industrial Revolution.” cal revolution during this time period.
So was there an acceleration in skill Second, demand for skills appears to
bias? This question is difficult to an- have accelerated starting in the late
swer, as we lack direct measures of the 1970s, precisely when the supply of
degree of skill bias. To tackle this ques- skills increased very rapidly. Exogenous
tion, one therefore needs to look at a technology theories do not explain the
variety of evidence often pointing in timing of this acceleration. 7
different directions. I conclude below 6 See, among others, Krueger (1993), Eli Ber-
that skill-biased technical change is man, John Bound, and Griliches (1994), and David
likely to have accelerated over the past Autor, Katz, and Krueger (1998) for evidence that
several decades. This conclusion is the rapid spread of computers has increased the
demand for skills. See Per Krusell, Lee Ohanian,
based on the sharp increase in overall Victor Rios-Rull, and Giovanni Violante (2000),
inequality starting in the 1970s and on Oded Galor and Daniel Tsiddon (1997), Green-
the fact that returns to schooling rose wood and Yorukoglu (1997), Aghion and Howitt
(1998, ch. 9), Caselli (1999), Galor and Omer
over the past thirty years despite the Moav (2000), Violante (2000), Yonna Rubinstein
unusually rapid increase in the supply and Tsiddon (1999), Aghion, Howitt, and Violante
of educated workers. (2000), and Eric Gould, Moav, and Bruce Wein-
berg (2000) for models in which rapid technical
Why did the demand for skills accel- change increases the demand for skills and causes
erate over this period? And why has a rise in inequality.
7 Naturally, supply and demand may have
new technology favored more skilled
moved together because supply responded to de-
workers throughout the twentieth cen- mand. I argue below that the large increase in the
tury, but not during the nineteenth cen- supply of educated workers was not in anticipation
tury? One approach would view tech- of, or in response to, high returns, but driven by a
variety of other factors. More generally, I often
nology as exogenous, stemming from focus on the effect of the supply of skills on tech-
advances in science or from the behav- nology not because I view supply as exogenous,
12 Journal of Economic Literature, Vol. XL (March 2002)
that they do not provide a natural expla- zational change, labor-market institu-
nation for the fall in the wages of tions, and international trade have in-
low-skill workers. Although a number of teracted with technical change in a fun-
papers, including Caselli (1999), Green- damental way, amplifying the direct
wood and Yorukoglu (1997), and Galor effect of technical change on inequality,
and Moav (2000), show that technologi- and likely causing the decline in the
cal revolutions may be associated with a wages of less-skilled workers.
fall in the wages of low-skill workers, it Therefore, the overall picture that
is difficult to see how sustained techno- emerges is not necessarily one in which
logical change can be associated with technology is the only factor affecting
an extended period of falling wages of the distribution of income. On the con-
low-skill workers and stagnant average trary, the underlying thesis of this essay
wages. This leads to the next question is that technology itself is no more than
for this essay. an endogenous actor. To explain the
Why did the real wages of low-skill changes in the distribution of income,
workers fall over the past several de- and to forecast what other changes may
cades? There are a number of possible happen in the future, we need to under-
answers. First, labor-market institu- stand the forces that shape technologi-
tions, for example labor unions, under- cal progress, and how technology inter-
went important changes over the past acts with the overall organization of the
thirty years, and these changes may labor market.
have reduced the wages of many manu- There is considerable uncertainty on
facturing workers, causing an increase many issues, and both more theoretical
in inequality and a decline in the real and more empirical work are needed.
wages of low-skill workers (e.g., Rich- Two areas deserve special attention.
ard Freeman 1991; John DiNardo, Ni- The first is the differential behavior of
cole Fortin, and Lemieux 1995; David residual inequality and returns to
Lee 1999). Second, international trade schooling during the 1970s. Most
between skill-scarce less-developed coun- economists view changes in residual in-
tries and skill-abundant rich economies equality as related to changes in labor-
increased over this period, and this may market prices. It is therefore puzzling
have put downward pressure on the that during the 1970s, while returns to
wages of low-skill workers in the United schooling fell, residual and overall in-
States (e.g., Adrian Wood 1994; Edward equality increased. I argue below that
Leamer 1995). Third, there has been a models based on a single skill index
transformation of the way in which (one type of skill or many types of skills
firms are organized, or perhaps in the that are perfect substitutes) are unable
way that firms and workers match (see, to explain this pattern. Instead, we need
for example, Acemoglu 1999a; Michael models with multidimensional skills.
Kremer and Eric Maskin 1999; Timothy Moreover, for this type of model to ex-
Bresnahan 1997; Bresnahan, Erik Bryn- plain the behavior of residual inequality
jolfsson, and Lorin Hitt 1999; and during the 1970s and the 1980s, techno-
Autor, Frank Levy, and Richard Mur- logical progress needs to have changed
nane 2000). Although each of these fac- the demand for different types of skills
tors could have been the cause of the differentially. The endogenous technol-
recent changes in the wage structure, I ogy models discussed above provide a
argue that their direct effect has been possible explanation for why different
limited. Instead, I suggest that organi- dimensions of skills may have been
14 Journal of Economic Literature, Vol. XL (March 2002)
.8
.6
.6
.5
.4
.4
.2
.3 0
39 49 59 69 79 89 96
year
Relative Supply of College Skills and College Premium
Figure 1. The Behavior of the (log) College Premium and Relative Supply of College Skills (weeks worked by
college equivalents divided by weeks worked of noncollege equivalents) between 1939 and 1996. Data from
March CPSs and 1940, 1950, and 1960 censuses.
very sharply during the 1980s. This in- illustrates two more important patterns:
crease in the returns to schooling has 1. Overall wage inequality started to
been one of the major motivating facts increase sharply in the early 1970s after
for the empirical inequality literature a period of relative stability—prior to
(e.g., Bound and Johnson 1992; Katz the 1970s, the 90th, 50th, and 10th per-
and Murphy 1992). centiles of the wage distribution fol-
There have also been important lowed each other closely, but came
changes in the overall distribution of apart sharply in the 1970s.
wages. Figure 2 plots the 90th, 50th 2. Median wages stagnated from 1975
and 10th percentiles of the overall onwards, while workers at the 10th
wage (weekly earnings) distribution percentile of the wage distribution (i.e.,
for white male workers between 1963
and 1997 (with the 1963 values for this would likely contribute to the composition ef-
all series indexed to 100). 9 This figure fects. Moreover, male-female wage difference nar-
rowed substantially over the same time period as
9 Sample constructed as described in the appen- well. School quality for black men also under-
dix. I focus here on wage inequality for white men went significant transformation (e.g., Welch 1973;
since labor market participation of women in- Card and Krueger 1992), and this could create
creased substantially over the sample period, and significant composition effects.
16 Journal of Economic Literature, Vol. XL (March 2002)
150
140
130
120
110
100
90
65 70 75 80 85 90 95
year
Indexed Wages for White Males 1963–97
Figure 2. Changes in the Indexed Value of the 90th, 50th, and 10th Percentiles of the Wage Distribution for
White Males (1963 values normalized to 100). Data from March CPSs.
“low-skill workers”) saw their earnings Figure 3 turns to another measure: re-
fall in real terms to levels even below sidual (within-group) inequality, which
those in 1963. 10 shows inequality among observationally
equivalent workers. This figure displays
10 Average wages, like median wages, have stag-
nated. For example, white men aged 30–49 earned
three measures of residual inequality
409 a week in 1999 dollars in 1949, and 793 in among white male workers between
1969, which corresponds approximately to a 3.4 1963 and 1997: 50–10, 90–50 and 0.5
percent a year increase in real wages between
1949 and 1969. In contrast, the same age group
times 90–10 log wage residual differen-
earned 909 in 1989, or experienced only a 0.6 per- tials (I plot 0.5 times 90–10 wage differ-
cent a year increase between 1969 and 1989 (all entials in order to fit this on the same
numbers author’s calculation from census data).
The behavior of the median and average wage
scale as the other measures).
growth depends on the consumption deflator. I
have followed the literature in using the personal the increase in benefits, the share of labor in na-
consumption expenditure deflator. It has been ar- tional income has not fallen over this period (see,
gued that this deflator overstates inflation because e.g., Krueger 1999). So whether average wages
of difficulties in measuring quality change (e.g., have stagnated or continued to increase in line
Michael Boskin et al. 1995). Even in the presence with output growth depends on how benefits are
of such measurement problems, a large gap re- valued relative to earnings. It is also important to
mains between the rate of increase of real wages note that if these non-wage benefits are taken into
before and after the 1970s, unless there is an “ac- account, inequality appears to have increased even
celeration” in this bias exactly around the 1970s. more than the numbers here indicate (Brooks
Part of this gap is due to the increased importance Pierce 2000). This is because high-wage workers
of nonwage income and benefits. In fact, thanks to are the primary recipients of such benefits.
Acemoglu: Technical Change, Inequality, and the Labor Market 17
.65
.6
.55
.5
.45
.4
65 70 75 80 85 90 95
year
Residual Inequality Measures for White Males 1963– 97
Figure 3. 90– 50, 50–10 and 0.5 × 90–10 Differentials from Log Weekly Wage Regressions for White Males
Aged 18–65.
and residual inequality increased. I the returns to skills will also lead to an
return to this issue later in the essay. increase in within-group inequality.
Suppose that there are L(t) unskilled
3. Introduction to the Theory (low-education) workers and H(t) skilled
of Skill Premia (high-education) workers, supplying la-
bor inelastically at time t. All workers
While, undoubtedly, many factors af- are risk neutral, and maximize (the pres-
fect the distribution of wages, a natural ent value of) labor income. Also sup-
starting point for an economic analysis pose that labor markets are competitive
is that of supply and demand. In the in- (I return below to the role played by
troduction to his pioneering study of noncompetitive elements, especially in
income distribution, Tinbergen (1975, the European context).
p. 15) wrote The production function for the ag-
. . . what matters is the difference between gregate economy takes the constant
qualities available and qualities required by elasticity of substitution (CES) form
the demand side, that is by the organization
of production. (italics in original) Y(t) = [(Al(t)L(t))ρ + (Ah(t)H(t))ρ]1 ⁄ ρ, (2)
This is where I begin as well. I intro- where ρ ≤ 1, and Al(t) and Ah(t) are factor-
duce a simple framework that links augmenting technology terms. Although
wages to supply of skills and to demand all the results of interest hold for a general
generated by the technology possibili- constant returns to scale F(.) function, I
ties frontier of the economy. There are focus on the CES production function to
two types of workers, skilled and un- simplify the discussion. I drop the time
skilled (high and low-education work- argument when this causes no confusion.
ers), who are imperfect substitutes. Im- The elasticity of substitution between
perfect substitution between the two skilled and unskilled workers in this
types of workers is important in under- production function is σ ≡ 1 ⁄ (1 − ρ). I
standing how changes in relative sup- refer to skilled and unskilled workers as
plies affect skill premia. For now I gross substitutes when the elasticity of
think of the unskilled workers as those substitution σ > 1 (or ρ > 0), and gross
with a high school diploma, and the complements when σ < 1 (or ρ < 0).
skilled workers as those with a college Three noteworthy special cases are: (i)
degree. 12 So the focus in this section is σ → 0 (or ρ → −∞) when skilled and un-
on returns to schooling (or between- skilled workers will be Leontieff, and
group inequality), and I use the terms output can be produced only by using
“skill” and education interchangeably. skilled and unskilled workers in fixed
In practice, education and skills are proportions; (ii) σ → ∞ when skilled and
only imperfectly correlated, so it is use- unskilled workers are perfect substi-
ful to bear in mind that since there are tutes, and (iii) σ → 1, when the pro-
skilled and unskilled workers within the duction function tends to the Cobb
same education group, an increase in Douglas case. The value of the elasticity
of substitution will play a crucial role in
12 This classification of workers into skilled and
the interpretation of the results that fol-
unskilled groups is obviously appropriate only for
the twentieth-century United States. In many low. In particular, in this framework,
other countries or periods, high school graduates technologies either increase the pro-
could be considered to be “skilled” workers. More ductivity of skilled or unskilled workers,
generally, the two-skill model is a convenient
simplification, less realistic than a world with a that is, there are no explicitly skill-
continuum of imperfectly substitutable skills. replacing or unskilled-labor-replacing
Acemoglu: Technical Change, Inequality, and the Labor Market 19
of (5) shows that the result depends on elasticity of substitution between skilled
the elasticity of substitution: and unskilled workers greater than 1.
It is also useful to compute the aver-
∂ ln ω σ−1 age wage in this economy. Without con-
= .
∂ ln (Ah ⁄ Al) σ trolling for changes in the educational
composition of the labor force, the
Therefore, if σ > 1 (i.e., ρ ∈ (0, 1]), then average wage is
improvements in the skill-complementary
technology increase the skill premium. Lw L + Hw H [(AlL)ρ + (AhH)ρ]1 ⁄ ρ (7)
w= = ,
This can be seen in figure 4 as a shift out L+H 1+ H⁄L
of the relative demand curve, moving the
skill premium from ω to ω′′. The con- which is also increasing in H/L as long as
verse is obtained when σ < 1: that is, the skill premium is positive (i.e., ω > 1
when σ < 1, an improvement in the pro- or Aρh(H ⁄ L)ρ − Aρl > 0). Intuitively, as the
ductivity of skilled workers, Ah, relative skill composition of the labor force
to the productivity of unskilled workers, improves, wages will increase.
Al, shifts the relative demand curve in Therefore, the results so far imply
and reduces the skill premium. This case that in response to an increase in H/L:
appears paradoxical at first, but is, in 1. The relative wages of skilled workers,
fact, quite intuitive. Consider, for ex- the skill premium ω = w H ⁄ w L, decreases.
ample, a Leontieff (fixed proportions) 2. Wages of unskilled workers increase.
production function. In this case, when 3. Wages of skilled workers decrease.
Ah increases and skilled workers become 4. The average wage (without control-
more productive, the demand for un- ling for education) rises.
skilled workers increases by more than
the demand for skilled workers. In some It is also useful to highlight the impli-
sense, in this case, the increase in Ah is cations of an increase in Ah on wage
creating an “excess supply” of skilled levels. First, an increase in Ah, with Al
workers given the number of unskilled constant, corresponds to an increase in
workers. This excess supply increases the Ah ⁄ Al; the implications of this change
unskilled wage relative to the skilled on the skill premium were discussed
wage. This observation raises an impor- above. Moreover if Ah increases, every-
tant caveat. It is tempting to interpret thing else being equal, we expect both
improvements in technologies used by the wages of unskilled and skilled work-
skilled workers, Ah, as “skill-biased.” ers (and therefore the average wage) to
However, when the elasticity of substitu- increase: in this framework, technological
tion is less than 1, it will be advances in improvements always increase all wages.
technologies used with unskilled work- The most central result for our pur-
ers, Al, that increase the relative produc- poses is that as H/L increases, the skill
tivity and wages of skilled workers, and premium, ω , should fall. In terms of
an increase in Ah relative to Al will be figure 4, the increase in supply cor-
“skill-replacing.” responds to a rightward shift in the ver-
Nevertheless, the conventional wis- tical line from H/L to H′ ⁄ L′, which
dom is that the skill premium increases would move the economy along the
when skilled workers become relatively downward sloping demand curve for
more—not relatively less—productive, skills. But this tendency of the skill pre-
which is consistent with σ > 1. In fact, mium to fall could be counteracted by
as noted above, most estimates show an changes in technology, as captured by
22 Journal of Economic Literature, Vol. XL (March 2002)
σ−1
σ
ln (Ah ⁄ Al). Therefore, this simple for- of wages and employment. Autor, Katz,
mulation encapsulates the essence of and Krueger (1998) report employment
the two forces that Tinbergen (1975) and wage-bill shares for different
emphasized: groups of workers in their appendix ta-
The two preponderant forces at work are ble A1. If we assume a specific value for
technological development, which made for σ, we can translate these numbers into
a relative increase in demand and hence in changes in Ah ⁄ Al. In particular, notice
the income ratio . . . and increased access that the relative wage bill of skilled
to schooling, which made for a relative workers is given by
decrease. (p. 35, italics in original)
(σ − 1) ⁄ σ (σ − 1) ⁄ σ
wHH Ah H
As discussed in the empirical trends SH = = . (8)
section, the past sixty years, and par- w LL Al L
ticularly the past thirty years, have wit- Hence, we have
nessed a rapid increase in the supply of
Ah SσH ⁄ (σ − 1)
skills, H/L, but no corresponding fall in = . (9)
the skill premium. This implies that the Al H⁄L
demand for skills must have increased— In table 1, I calculate the implied
as a result of Tinbergen’s “technological Ah ⁄ Al values for σ = 1.4 and for σ = 2
development”—to prevent the relative using workers with some college, col-
wages of skilled workers from declining. lege graduates, and college equivalents
Although in richer models there could definitions of Autor, Katz, and Krueger
be other factors leading to such a steady (1998)—see their paper for a more de-
increase in the demand for skills, the tailed analysis that controls for potential
cause highlighted by this simple frame- composition effects. In all cases, there
work, skill-biased technical change, is a is a large implied increase in Ah ⁄ Al and
natural candidate. More explicitly, the (Ah ⁄ Al)(σ − 1) ⁄ σ. For example, the num-
relative productivity of skilled workers, bers indicate that, assuming an elastic-
(Ah ⁄ Al)(σ − 1) ⁄ σ, must have increased. ity of substitution of 1.4, the relative
The increase in (Ah ⁄ Al)(σ − 1) ⁄ σ can be productivity of college graduates, Ah ⁄ Al,
interpreted in a number of different which was approximately 0.030 in 1960,
ways. In a two-good economy, such skill- increased to 0.069 in 1970, and to 0.157
biased technical change corresponds to in 1980. Between 1980 and 1990, it in-
an increase in Ah ⁄ Al and ρ > 0 (σ > 1) creased by a factor of almost three to
—i.e., skilled workers becoming more reach 0.470. As equation (5) shows,
productive. Skill-biased technical change changes in the demand index
σ−1
could also take the form of a decrease D = (Ah ⁄ Al) σ may be more informative
in Ah ⁄ Al and ρ < 0 (σ < 1). In this case than changes in Ah ⁄ Al, so table 1 also
the “physical” productivity of unskilled gives the evolution of D.
workers would increase, but their rela- The view that the post-war period is
tive wages would fall due to relative characterized by skill-biased technical
price effects. Alternatively, with the change also receives support from the
one-good interpretation, skill-biased within-industry changes in employment
technical change simply corresponds to patterns. With constant technology, an
a change in the production function increase in the relative price of a factor
that increases (Ah ⁄ Al)(σ − 1) ⁄ σ. should depress its usage in all sectors.
Some back-of-the-envelope calcula- Since the college premium increased
tions provide a sense of the rise in Ah ⁄ Al after 1979, with constant technology,
implied by the changes in the structure there should be fewer college graduates
Acemoglu: Technical Change, Inequality, and the Labor Market 23
TABLE 1
EMPLOYMENT SHARES AND SKILL-BIASED TECHNICAL CHANGE, 1940–1990
Note: The first panel gives the ratio of the employment of skilled relative to unskilled workers, and the wage bill of
skilled to unskilled workers for the corresponding skill categories. These data are taken from Autor, Katz, and
Krueger (1998). Some college refers to those with more than high school (hence the measure is those with more
than high school divided by those with high school or less). College graduate refers to all those with a college
degree, and college equivalent is defined, as in Autor et al., as those with a college degree + 0.5 × those with some
college (correspondingly, the unskilled are defined as those with high school and less + 0.5 × those with some
college). The bottom panel gives the implied technology shifts using equation (9) above for different values of the
σ−1
elasticity of substitution. The demand index D is defined as (A h ⁄ A l) σ .
employed in all sectors—and the sec- complementarity during the 1910s and
toral composition should adjust in order 1920s. In light of this evidence, one
to clear the market. The evidence is very might consider the bulk of the twenti-
much the opposite. Berman, Bound, eth century to have been characterized
and Griliches (1994) and Murphy and by skill-biased technical change, though
Welch (1993) show a steady increase in whether technical change during the
the share of college labor in all sectors. early twentieth century was or was not
This discussion leads to my first con- skill-biased is not central for the focus
clusion, which I highlight for future of this paper.
reference.
4. Steady-Demand and Acceleration
Conclusion 1. The past sixty years must Hypotheses
have been characterized by skill-biased
technical change. The previous section highlighted the
importance of skill-biased technical
Furthermore, Goldin and Katz (1998) change over the past several decades. A
provide evidence of technology-skill first hypothesis is that skill-biased
24 Journal of Economic Literature, Vol. XL (March 2002)
the college wage-bill share is related to the demand for skills, since industries
the demand for skills as shown by equa- that are highly computerized may de-
tion (9). The results indicate that in an mand more skilled workers for other
industry where computer use increased reasons as well. 18 In fact, when Autor,
by 10 percent, the college wage-bill Katz, and Krueger (1998) run the above
share grew by about 0.15 percent a year regressions for the 1960–70 college
faster between 1980 and 1990, and 0.3 wage-bill shares, they obtain
percent faster a year between 1990 and
1996. ∆Sc60 − 70 = .085 + .071 ⋅ ∆cu84 − 93.
Although this evidence is suggestive, (.058) (.025)
it does not establish that there has been Therefore, industries investing more in
a change in the trend growth of skill- computers during the 1980s were al-
biased technology. As pointed out in ready experiencing more skill upgrading
conclusion 1 above, the only way to during the 1960s, before the spread of
make sense of the post-war trends is to computers (though perhaps slower than
incorporate skill-biased technical change after the 1980s, since the coefficient
over the whole period. Moreover, here is about half of that between 1980
Goldin, and Katz (1998) present evi- and 1990). This suggests that at least
dence suggesting that capital-skill com- part of the increase in the demand for
plementarity may have been as high skills coming from highly computerized
during the 1910s as during the recent industries may not be the direct effect of
period because of increased demand for computers, but reflect a secular long-run
skills coming from the introduction of shift toward more skilled workers. So
electricity in most manufacturing pro- faster skill upgrading by highly comput-
cesses. Similarly, even though there erized industries is not inconsistent with
were few computers in workplaces the steady-demand hypothesis.
before the 1970s, other technological The third, and probably most power-
developments may have increased the ful, piece of evidence in favor of an ac-
demand for skills as rapidly as—or more celeration in skill bias also comes from
rapidly than—computers. Therefore, the Autor, Katz, and Krueger (1998). They
question is whether computers and the document that the supply of skills grew
associated information technology ad- faster between 1970 and 1995 than be-
vances increased the demand for skills tween 1940 and 1970—by 3.06 percent
more than other technologies did dur- a year during the latter period com-
ing the 1950s and the 1960s, or even pared to 2.36 percent a year during the
earlier. This question cannot be an- earlier thirty years. In contrast, the col-
swered by documenting that computer- lege premium increased between 1970
ized industries demand more skilled and 1995 by about 0.39 percent a year,
workers. 17 while it fell by about 0.11 percent a
Cross-industry studies also may not year during the earlier period. If de-
reveal the true impact of computers on mand for skills had increased at a steady
pace, the college premium should have
17 This argument is related to a point first raised
by Lawrence Mishel and Jared Bernstein (1994). 18 Mark Doms, Timothy Dunne, and Kenneth
They pointed out that much of the evidence pre- Troske (1997) show that new technologies (but
sented in favor of the impact of technology on in- not computers) are adopted by plants that have
equality shows that there has been skill-biased more skilled and more highly paid workers, and
technical change during the 1980s, not that skill- these plants do not increase their wages or de-
biased technical change has accelerated relative to mand for skills after the implementation of these
earlier periods. technologies.
Acemoglu: Technical Change, Inequality, and the Labor Market 27
also fallen since 1970. 19 Moreover, more flexible time trends show an accel-
Autor, Katz, and Krueger (1998) docu- eration in the relative demand for skills
ment greater within-industry skill up- during the 1970s or the 1980s (the cubic
grading in the 1970s, 1980s, and 1990s and quartic time trends are almost iden-
than in the 1960s, which is also con- tical, hence practically indistinguishable
sistent with more rapid skill-biased in the figure).
technical change during these later A fourth piece of evidence comes
decades. from Greenwood and Yorukoglu (1997)
A simple regression analysis also con- and Per Krusell et al. (2000). These
firms this point. I combined the data authors argue, based on the work of
from the March CPSs and decennial Griliches (1969), that equipment capital
censuses used in figure 1 above. Using is more complementary to skilled work-
these data, a regression similar to that ers than unskilled workers. This prem-
of Katz and Murphy for the period ise may be reasonable since advances in
1939–96 yields similar results: equipment often appear to substitute
H
machines for tasks previously per-
ln ω = 0.025 ⋅ t − 0.56 ⋅ ln L , formed by unskilled workers. Following
(0.01) (0.20) the work by Robert Gordon (1990) and
Greenwood, Zvi Hercowitz, and Krusell
with an R 2 of 0.63 and an implied elastic-
(1997), these papers document that the
ity of substitution of 1.8, which is some-
post-war period has witnessed a secular
what larger than the estimate of Katz
decline in the relative price of equip-
and Murphy. However, adding higher
ment capital, and argue that the associ-
order terms in time (i.e., time squared,
ated increase in the stock of equipment
time cubed, etc.) improves the fit of the
capital led to skill-biased technical
model considerably, and these higher-
change. Moreover, they argue that this
order terms are significant. In figure 5, I
relative decline accelerated in the early
plot the implied time trends from regres-
1970s, and the associated acceleration
sions with higher-order terms as well as the
in the stock of equipment capital
linear trend (all numbers were rescaled
increased the demand for skills.
to fit in one graph). All three of these
Krusell et al. (2000) formalize their
19 The college premium fell between 1940 and approach by assuming the following
1970 in part because it is estimated to be very high production function:
in the 1940 census. There may be reasons to be
suspicious of data quality from this census, be- Y = Kαs [b1Lµ + (1 − b1)(b2Kλe
cause (i) the education variable was different, (ii)
there may have been an overstatement of years of + (1 − b2)H λ)µ ⁄ λ](1 − α) ⁄ µ
schooling, possibly by as much as a factor of 1.5 or where Ks is structures capital (such as
2 for some cohorts, and (iii) there was no self-
employment income in this census. But it is not buildings), and Ke is equipment capital
clear whether any of these measurement problems (such as machines). The parameter
will cause an upward bias in the college premium. σ1 = 1 ⁄ (1 − λ) is the elasticity of substitu-
In any case, the level of the college premium from
this census is not out of line with other historical tion between equipment and skilled
evidence (see, e.g., Goldin and Katz 2000; and workers, and σ2 = 1 ⁄ (1 − µ) is the elastic-
Piketty and Saez 2001). Moreover Autor, Katz, and ity of substitution between unskilled
Krueger show that even ignoring data from the
1940 census, there is evidence for an acceleration workers and the equipment-skilled
in the skill bias of technical change. For example, worker aggregate. If σ1 > σ2 (i.e., µ > λ),
for the range of the values for the elasticity of sub- equipment capital is more complemen-
stitution between σ = 1 and 2, skill-biased techni-
cal change appears more rapid during the 1980s tary to skilled workers than unskilled
than in the 1970s and the 1960s. workers, and an increase in Ke will
28 Journal of Economic Literature, Vol. XL (March 2002)
39 49 59 69 79 89 96
year
Alternative Time Trends for the Relative Demand for Skills
Figure 5. Estimates of Time Trends from Regressions of ln ω on ln (H/L), year, year 2, year 3 and year 4
between 1939 and 1996 (with observations in 1939, 1949, 1959 from the decennial censuses and
observations for 1963–96 from the March CPSs)
increase the wages of skilled workers equipment goods, there will be an asso-
more than the wages of unskilled work- ciated increase in the quantity of equip-
ers. More formally, the skill premium in ment capital, Ke, increasing the demand
this model is for skills steadily.
Figure 6, which plots the log of this
wH
ω= (12) relative price series, shows the faster
wL
proportional decline after the 1970s.
(1 − b2 )(1 − b1 )H λ − 1 (b2 K λe + (1 − b2 )Hλ)(µ − λ) ⁄ λ
= . The behavior of the relative price series
b1L µ − 1
then suggests that there may have been
Differentiation of (12) shows that as an acceleration in the substitution of
long as µ > λ, which corresponds to equipment capital for labor, causing
equipment capital being more comple- more rapid skill-biased technical change.
mentary to skilled workers than un- Nevertheless, because there are seri-
skilled workers, we have ∂ω ⁄ ∂Ke > 0. So ous difficulties in adjusting capital
provided that equipment capital is more prices for quality, we may want to be
complementary to skilled workers than cautious in interpreting this evidence.
unskilled workers, an increase in the Another problem comes from the fact
quantity of equipment capital will in- that, as I discuss in more detail below, a
crease the demand for skills. Since the variety of other evidence does not sup-
post-war period has been characterized port the notion of faster technological
by a decline in the relative price of progress since 1974, which is a basic
Acemoglu: Technical Change, Inequality, and the Labor Market 29
–.1
Log relative price of equipment capital
–.4
–.7
–1
–1.3
tenet of this approach. Finally, one column 1. The remainder of the table
would presume that if, in fact, the de- shows that once these terms are entered
cline in the relative price of equipment simultaneously with the time trend, the
capital is related to the increase in the time trend is significant, while there is
demand for skills, then in a regression no evidence that the relative price of
of equation (11), it should proxy for the equipment capital matters for the de-
demand for skills and perform better mand for skills. While this evidence
than a linear time trend. Table 2 re- may simply reflect the fact that the rela-
ports a series of regressions which show tive price of equipment is measured
that, on the contrary, the level or the with error, it casts some doubt on the
log of the relative price of equipment view that the relative price of equip-
capital is not significant in such regres- ment capital is directly linked to the
sions. Column 1 shows the equivalent of demand for skills and that its faster
the regression by Katz and Murphy decline since the 1970s indicates an
(1992) with only a time trend and the acceleration in skill bias.
relative supply of skills. Columns 2 and A final piece of evidence for accelera-
3 show regressions that replace the time tion comes from the behavior of overall
trend with the level and log of the rela- and residual inequality over the past
tive price of equipment capital. These several decades. The sharp rise in both
terms are significant, but the fit of the overall and residual wage inequality
regression is worse than the one in since the early 1970s, documented in
30 Journal of Economic Literature, Vol. XL (March 2002)
TABLE 2
THE EFFECT OF THE RELATIVE PRICE OF EQUIPMENT ON SKILLED PREMIA
Note: This table reports the regression of the log college premium on a linear time trend,
the log relative supply of skilled workers and various measures of the relative price of
equipment capital. For comparability, all data taken from Krusell et al. (2000).
section 2, weighs in favor of a marked Pierce view, instead, suggests that the
change in labor market prices and de- increase in residual inequality and the
mand for skills during recent decades. bulk of the rise in overall inequality
This argument is based on the view that are related to changes in labor market
changes in residual inequality reflect prices, and therefore to the supply and
changes in labor market prices, a thesis demand for skills. Second, according to
put forth by Chinhui Juhn, Murphy, this view, the rise in residual inequality
and Brooks Pierce (1993). 20 This view is is an important piece of evidence in the
important for an interpretation for the debate on acceleration: residual in-
recent changes in wage structure for equality, which was stable during the
two reasons. First, as the evidence in 1960s, began to increase rapidly during
section 2 indicates, much of the recent the early 1970s (figures 2 and 3), indi-
increase in overall inequality is due to cating a discontinuity in labor market
the rise in residual inequality. If resid- prices and, most likely, in the rate of
ual inequality were unrelated to the de- increase of the demand for skills.
mand and supply of skills, the frame- A concrete example is useful for clari-
work here could only account for a fying why residual inequality is linked
relatively small fraction of the increase to labor market prices. Suppose that
in overall inequality. The Juhn-Murphy- two otherwise identical individuals dif-
20 Of course, an alternative—and more cynical—
fer in terms of their unobserved skills
view would be to interpret residual inequality as (for example, in terms of interpersonal
“a measure of our ignorance” (as Moses Abramo- skills, motivation, specific skills for their
vitz 1957 did for TFP). When a standard wage job, or IQ). 21 Denote the unobserved
regression such as (1) provides a good fit, the
residuals will be less disperse. Nevertheless, given
the variety of skills that we are unable to measure 21 By unobserved skills, I mean skills that are
in standard data sets, much of the residual will not observed by the econometrician. These skills
plausibly reflect rewards to some unobserved could be—and are likely to be—observed by em-
skills. ployers. These types of skills are often referred to
Acemoglu: Technical Change, Inequality, and the Labor Market 31
or the 1980s. In terms of the model de- acceleration is that new technologies
veloped above, this corresponds to a are more complementary to skilled
more rapid increase in Ah ⁄ Al during this workers than to unskilled workers—for
period, translating into greater skill pre- example, there are more rapid advances
mia. Many of the proponents of this in the technologies used by skilled
view argue that the acceleration in skill workers, as captured by Ah above. Rapid
bias is, at least in part, related to infor- technological progress then corre-
mation technology and computers (for sponds to an acceleration in skill bias.
example, Krueger 1993; Berman, Bound, An alternative perspective, building on
and Griliches 1994; Autor, Katz, and an idea originally suggested by Nelson
Krueger 1998; Berman, Bound, and and Phelps (1966), also focuses on the
Machin 1998). effect of rapid technical change on in-
An interesting version of this story is equality, but puts the emphasis on the
the one developed by Krusell et al. ability of skilled workers to deal with
(2000) discussed above. They argue that the introduction of new technologies.
the demand for skills accelerated as a According to this view, demand for
result of the more rapid decline in skills will automatically increase during
the relative price of capital equipment periods of rapid technological change.
beginning in the early 1970s. 24 The Welch (1970) gave an early succinct
Krusell et al. theory is attractive since it summary of these two views. The first
provides a unified framework in which view, which we may call the accelera-
we can identify both the cause of the tion hypothesis, sees human capital as a
steady increase in the demand for skills, factor of production, and the more rapid
and the source of the more rapid skill- increase in the demand for skills results
biased technical change, though the evi- from an acceleration in technical change
dence provided in the previous section that favors this factor of production. In
casts some doubt on the link between other words:
the relative price of equipment and the
demand for skills. [T]echnical change may not be neutral
The main idea of all these theories of between skill classes. It may be that incre-
ments in technology result in increments in
the relative productivity of labor that are
24 I classify this approach as one of exogenous positively related to skill level. (Welch 1970,
technology, since the driving force, the decline in p. 38)
the relative price of equipment capital, is assumed
exogenous.
An alternative interpretation of the approach by In contrast, the second view—the
Krusell et al. (2000) is that the main determinant Nelson-Phelps hypothesis—argues that25
of the demand for skills is not technology-skill
complementarity, but capital-skill complementarity. 25 A recent paper by Samuel Bowles, Herbert
I believe that the distinction between technology- Gintis, and Melissa Osborne (2001) has a similar
skill versus capital-skill is not very useful. Capital- classification of different approaches. They call
skill complementarity could play an important role the first view Walrasian, and the second Schumpe-
only in a model as in Greenwood et al. (1997) or terian. In the first, skills that enable workers to
Krusell et al. (2000), where new capital embeds produce more are valued, while in the second, it is
superior technologies. In this sense, it is a combi- skills that enable workers to deal with changes in
nation of new capital and new technologies that is economic and social environments. They also pro-
increasing the demand for skills. Moreover, Autor, pose an alternative, Coasian, view, where “skills”
Katz, and Krueger (1998) show that demand for are workers’ capacity to work within organizations
more educated workers across industries is af- and follow authority. From the point of view of
fected by high-tech capital (e.g., computers), but the analysis here, this view is not fundamentally
not by equipment capital, suggesting further that different from the Walrasian view, since workers
it is new technologies, not simply capital intensity, are paid more for skills that increase their marginal
that matters for inequality. contribution to the profits of their employers.
Acemoglu: Technical Change, Inequality, and the Labor Market 33
[T]he productivity of education would be approaches, it is useful to consider a
positively related to the rate of change in use- simple model based on Galor and Moav
ful technology (the ability to change) and to
the size of the technological gap (room for (2000). Suppose that
innovation). In this case, if the rate of utiliza-
tion of technology is accelerating, or if the Al = φl(g)a and Ah = φha (14)
technology gap is growing, the return to
education will rise relative to other inputs. where a is a measure of aggregate tech-
(p. 38) nology, and g is the growth rate of a, i.e.,
g ≡ a⋅ ⁄ a. The presumption that skilled
Studies building on the Nelson- workers are better equipped to deal with
Phelps hypothesis include Galor and technological progress can be captured
Tsiddon (1997), Greenwood and Yoru- by assuming that φ′l < 0. Galor and Moav
koglu (1997), Caselli (1999), Aghion (2000) refer to this assumption as the
and Howitt (1998, ch. 9), Galor and “erosion effect,” since it implies that
Moav (2000), Violante (2000), Rubin- technical change erodes some of the es-
stein and Tsiddon (1999), Aghion, tablished expertise of unskilled workers,
Howitt and Violante (2000), and Gould, and causes them to benefit less from
Moav and Weinberg (2000). 26 These pa- technological advances than skilled work-
pers argue that there has been a tech- ers do. Substituting from (14) into (4),
nological revolution in the U.S. econ- the skill premium is
omy starting in the 1970s and relate the (σ − 1) ⁄ σ −1 ⁄ σ
rise in inequality to the increased wH Ah H
ω= =
demand for skills resulting from the w L Al L
technological revolution. For example, (σ − 1) ⁄ σ −1 ⁄ σ (15)
Greenwood and Yorukoglu (1997) draw φh H
= L .
a parallel between the First and the
φl(g)
Second Industrial Revolutions and what
has been happening in the U.S. econ-
Therefore, as long as φ′l < 0, more rapid
omy since 1974. Caselli (1999) develops
technological progress, as captured by a
a similar theory where a technological
higher level of g, will increase the skill
revolution increases the demand for
premium.
workers who can switch to the sectors
Theories that explain the increase in
that benefit from the introduction of
inequality as a result of rapid tech-
new technologies. 27
nological progress have a number of
To get a basic understanding of these
attractive features. 28 First, many econo-
26 See Aghion (2001) for an approach that com- mists and commentators view the ad-
bines the Nelson-Phelps insights with the Schum- vances in computer and information
peterian notion of creative-destruction to discuss
the impact of the diffusion of computers on technology as a break with the tech-
inequality. nologies of the past, and so are open to
27 The explanation offered by Rubinstein and
Tsiddon (1999), and Aghion, Howitt, and Violante 28 These theories also predict that inequality
(2000) is somewhat different. They argue that should increase when new technologies are being
there is increased uncertainty at times of rapid introduced, but should decline when these new
technological change, and more skilled workers technologies are standardized and being used rou-
are better able to cope with uncertainty. This idea tinely by many firms (see, for example, Galor and
is also related to a thesis first put forth by Michael Tsiddon 1997, or Aghion, Howitt, and Violante
Piore and Charles Sabel (1984) that the oil price 2000). So far, there seems to be no evidence of a
shocks increased the uncertainty faced by produc- decline in inequality in the United States, but per-
ers, and induced them to change the organization haps the years to come will see a return to the
of production toward organizational forms that levels of inequality experienced during the 1960s,
require adaptable workers. vindicating this approach.
34 Journal of Economic Literature, Vol. XL (March 2002)
the idea that we might be in the midst It is difficult to imagine how a new
of a technological revolution. Second, a and radically more profitable technol-
variety of evidence supports the notion ogy will first lead to 25 years of substan-
that skilled workers have a comparative tially slower growth. Although, in an
advantage in coping with rapid tech- influential paper, Paul David (1990)
nical change. Ann Bartel and Frank argues that the spread of electricity to
Lichtenberg (1987) show that firms in- American manufacturing was also slow
troducing new technologies hire more and productivity gains from electrifica-
skilled workers. Bartel and Nachum tion were limited until the 1920s, the
Sicherman (1998) document that re- parallel with the recent productivity
turns to unobserved ability appear to be slowdown should not be overstated.
higher in industries with more rapid First, though productivity growth from
technical change. Andrew Foster and electrification was sluggish during the
Mark Rosenzweig (1996) provide evi- early 1900s, the U.S. economy overall
dence from developing countries that had a much higher level of output
more educated workers are better growth than the growth levels experi-
placed to take advantage of advances in enced over the past three decades. Data
agricultural technology. from table A-XVIII of John Kendrick
The main difficulty with both the (1961) imply that output growth be-
theories based on the acceleration and tween 1899 and 1909 in the U.S. econ-
the Nelson-Phelps hypotheses is that omy was 4.2 percent a year, while be-
they rely explicitly on rapid technical tween 1909 and 1919, it was 3 percent,
change in recent decades. 29 There is and between 1920 and 1929, output
little direct evidence that the decades grew by 3.6 percent a year. Second, as
between 1970 and 1995 have been a pe- noted by Stephen Oliner and Daniel
riod of rapid technical change, how- Sichel (1994), computers and other ad-
ever. First, this period has experienced vanced office equipment have only been
sluggish TFP and output growth rela- a trivial part of the aggregate capital
tive to earlier periods. Greenwood and stock of the U.S. economy until the mid-
Yorukoglu (1997) and Hornstein and 1990s. It is therefore unlikely that the
Krusell (1996) argue that the slow TFP whole of the U.S. economy has been
growth itself may be an outcome of the adapting to the changes in this rela-
more rapid technical change. According tively small part of the capital stock. Fi-
to this argument, new revolutionary nally, as shown by Ernie Brendt, Cath-
technologies first reduce productivity erine Morrison, and Larry Rosenblum
growth as firms and workers spend time (1994), more computerized sectors did
learning to use these technologies. not perform any better in terms of labor
productivity growth over this period;
this pattern is also difficult to recon-
29 Another argument that applies only against
cile with a computer-led technological
approaches based on the Nelson-Phelps hypothe-
sis is that historical evidence is not necessarily in revolution.
line with a view that demand for skills always in- It is also useful to note that although
creases during times of rapid technical change. As computers have no doubt increased our
discussed in the introduction, the major techno-
logical changes of the early nineteenth century ap- standards of living and quality of life
pear to have been largely skill-replacing (unskill- over the past thirty years, they may be
biased), even though they seem as radical as much less radical innovations than cer-
computer technology. This suggests that it is
the skill bias of technology, not merely its rapid tain previous new technologies (see
arrival, that is important for the demand for skills. Gordon 1998). To gain perspective,
Acemoglu: Technical Change, Inequality, and the Labor Market 35
consider the difference that the tele- increase in the supply of skills. There is
graph made to a world in which the no a priori reason to expect the accel-
fastest medium of communication was eration in skill bias to coincide with the
pigeons. Mokyr (1990, p. 124) describes rapid increase in the supply of skills.
this as follows: Those who want to subscribe to the
exogenous technological progress view
The telegraph had an enormous impact on
19th-century society—possibly as great as
have to explain this as a chance event. 31
that of the railroad. Its community and politi- 5.2 Endogenous Skill-Biased Technical
cal value was vast, as was its effect in coordi-
nating international financial and commodity
Change
markets. Unlike the railroad, it had no close The theories discussed so far pre-
substitutes, the closest being homing pigeons
and semaphore.
sume technical change to be skill-
biased by nature (or, at the very least,
Or consider the difference that the auto- recent technologies to have increased
mobile and air conditioning made to the the demand for skills due to exogenous
quality of life, and electricity and in- reasons). A different perspective is to link
terchangeable parts made to the manu- the types of technologies that are devel-
facturing sector. As also pointed out by oped and adopted to (profit) incentives,
Gordon (1998), compared to these improve- or to demand pull as emphasized by
ments, the switch from mainframes to Schmookler (1966). 32
PCs, or from telephone to e-mail, or from Historical evidence is consistent with
the typewriter to the word processor may the notion that profit incentives and op-
be modest. 30 portunities are important for the de-
A final problem for all of the ap- velopment and introduction of new
proaches based on exogenous techno- 31 One could argue that the supply of skilled
logical developments is the coincidence workers increased because, during the 1960s,
in the timing of this change, and the workers anticipated that there was going to be a
technological discontinuity in the decades to
rapid increase in the supply of skilled come, and responded to this by increasing their
workers. Recall that there was a very education. This story appears quite unreasonable,
large increase in the supply of college however. There is no evidence that anyone, let
alone teenagers, foresaw the technological devel-
graduate workers during the late 1960s opments of the 1970s and the 1980s as early as the
and the early 1970s (figure 1 and table 1960s. Moreover, the increase in the supply of
1 show the large increase in the em- skills can be largely explained by two factors.
First, the Vietnam era draft laws encouraged
ployment share of college workers be- young males to stay in college longer (and indi-
tween 1970 and 1980). So the accelera- rectly also influenced female enrollments). Sec-
tion in skill bias is either concurrent ond, college enrollments were on an upward trend
since the early 1950s, and much of the increase in
with, or immediately follows, this large the supply of college graduate workers is ac-
counted for by the interaction of this upward
30 Another argument is that our ability to mea- trend with the very large relative size of the baby
sure TFP growth may have deteriorated following boom cohorts.
a change in technological regime. However, as 32 This is also the approach taken by the endog-
Martin Bailey and Gordon (1988) document, pro- enous growth theory, which determines the overall
ductivity slowdown has been concurrent in many rate of technical change—but not the degree of
sectors, some of them with little problems in skill bias—from profit incentives (e.g., Romer
measuring output or output quality. It is interest- 1990; Gene Grossman and Elhanan Helpman
ing to note, however, that evidence in favor of this 1991; Aghion and Howitt 1992). An advantage of
hypothesis may yet emerge, especially since pro- the endogenous-technology perspective in this
ductivity growth has been quite rapid during the context is that it provides clear reasons for the de-
past three years (but see Gordon 1998, and more gree of skill bias to increase even without a change
recently, Dale Jorgensen and Kevin Stiroh 2000, in the overall pace of technological improvement
on this). —see below.
36 Journal of Economic Literature, Vol. XL (March 2002)
technologies. Fernand Braudel (1984, cotton gin on the South was nothing
p. 566) took a strong position on this: short of spectacular. In the court case
[T]he efficient application of technology over the patent rights, Judge Johnson
lags, by definition, behind the general move- wrote:
ment of the economy; it has to be called on,
sometimes several times, to meet a precise “[. . . as a result of the cotton gin] . . .
and persistent demand. individuals who were depressed with poverty,
and sunk with idleness, have suddenly risen to
An interesting example of the timing wealth and respectability. Our debts have been
of technological development respond- paid off, our capital increased; and our lands
are treble in value.” (Quoted in Constance
ing to profit incentives is given by the Green 1956, p. 92)
introduction of the electric street car in
U.S. cities during the late nineteenth Within a short time, Eli Whitney’s gin
century. In his history of electricity in turned the United States from a cotton
the United States, David Nye (1990) importer into the largest cotton exporter
describes this as follows: in the world.
Cities grew larger, better transportation Schmookler (1966) provides a famous
was needed, so the [electric] trolley was in- argument for the importance of demand
vented, called into being by the crowded late pull in the development of many tech-
nineteenth century cities . . . . By the 1870s nologies. He documents rapid innova-
large cities had ceased to be accessible by
foot, or built to the scale of pedestrians, and
tions in railroads following increased
traffic congestion was terrible. (p. 85) purchases of railroad equipments, and
more generally argues that industries
This created the profit opportunities to with greater investments experience
develop and introduce the electric trol- faster technological progress because
ley. The technological requirements had the returns to such progress are greater.
been met long before, and awaited these A natural next step is then to argue that
profit opportunities. Nye writes, “How- the degree of skill bias in technical change
ever great the need for the electric trol- is also determined by profit opportuni-
ley after 1870, it was hardly a new idea; ties and by the demand for different
it had been the object of experiment types of technologies. Here, by endoge-
during four decades” (p. 86). nous (skill bias) technology approach I
Another example of the type of inno- mean the view that the degree of skill
vation responding to profit incentives is bias in technical change is influenced
provided by the cotton gin. In the late by profit incentives. 33
eighteenth and early nineteenth centu- A key determinant of profitability is
ries, only green seed cotton, which was market size. As Schmookler (1966)
difficult to clean, could be grown in stated in the title of two of his chapters:
most of the American South, and Brit- “The amount of invention is governed by
ain imported most of its cotton from the the extent of the market.” The most suc-
West Indies, Brazil, and India. A ma- cessful businessmen have always been
chine to remove the seeds was essential aware of this. For example, Matthew
for the success of American cotton. In
33 An alternative explanation for the increase in
contrast to almost all other textile inno-
wage inequality based on endogenous technical
vations that were taking place in Eng- change is offered by Huw Lloyd-Ellis (1999). In
land and Europe, such a machine, the his model, it is the interaction between endoge-
cotton gin, was developed in the United nous technical change and the slowdown in the
growth of labor quality that leads to increased in-
States in 1793 by Eli Whitney in re- equality. Skill bias is not endogenous in Lloyd-
sponse to this need. The impact of the Ellis’ model.
Acemoglu: Technical Change, Inequality, and the Labor Market 37
Boulton wrote to his business partner, his pioneering study of the supply-
James Watt, “It is not worth my while demand framework, in fact, foresaw this
to manufacture your engine for three possibility, and wrote (1975, p. 61): “. . .
countries only, but I find it very well an inequality-furthering phenomenon is
worth my while to make it for all technological development. But need it
the world” (quoted in Michael Scherer be? Increasingly we get the feeling that
1984, p. 13). Schmookler (1966) simi- technological development is not simply
larly provided many examples where something given, but that it may be
market size was crucial in determining guided, within limits.”
the directions of technical change. The At some level, the idea that there will
horseshoe is perhaps the most interest- be more technologies developed, cre-
ing one. Schmookler documented that ated and adopted for skilled workers—
there was a very high rate of innovation “within limits”—when there are more
throughout the late nineteenth and early skilled workers to use them is quite ap-
twentieth centuries in this very ancient pealing. An extreme form of this view is
technology, invented in the second cen- captured by my model in Acemoglu
tury B.C., and no tendency for inven- (1998), where forward-looking profit-
tors to run out of additional improve- maximizing firms create new technolo-
ments. On the contrary, inventions and gies anticipating the profitability of
patents increased because demand for these different investments. According
horseshoes was high. Innovations came to this view, it would be the Vietnam
to an end only when “the steam traction War draft laws and the high college en-
engine and, later, internal combustion rollment rates of the baby boom cohorts
engine began to displace the horse . . .” that induced the development of com-
(p. 93). puters. Such an interpretation is not lit-
According to this reasoning, the de- eral. A more plausible interpretation may
velopment of skill-biased technologies be that new technological platforms—
will be more profitable when they have macroinventions to use Joel Mokyr’s
a larger market size—i.e., when there term, or General Purpose Technologies
are more skilled workers. Therefore, to use Bresnahan and Trajtenberg’s term—
the equilibrium degree of skill bias stem from advances in basic science or
could be an increasing function of the from labs with little profit-maximizing
relative supply of skilled workers. An incentive. The development of the mi-
increase in the supply of skills will then crochip would be such a macroinven-
lead to skill-biased technical change. tion. But what matters for most workers
Furthermore, an acceleration in the in the labor force is how this new tech-
supply of skills can lead to an accelera- nological platform is developed, i.e.,
tion in the demand for skills. It is useful the microinventions that follow the
to link this approach to technological macroinvention. At the expense of over-
development with the above framework. simplifying, we can say that the micro-
While the above supply-demand frame- chip could have been used to develop
work explains the prices of skills by sup- advanced scanners to increase the pro-
ply and technology, the perspective of ductivity of unskilled workers, or ad-
endogenous skill bias relates technology vanced computer-assisted machines to
to the supply of skills. 34 Tinbergen, in be used by skilled workers to replace
unskilled workers. The theory of endog-
34 Naturally, it is also possible to link the supply enous skill bias requires that the extent of
of skills to skill premia. See below for a discussion. the advances in these two technologies
38 Journal of Economic Literature, Vol. XL (March 2002)
is fixed, equation (18) can only hold if There are a number of implications
the relative price of skill-intensive goods, that follow from this approach. First, as
p = ph ⁄ pl, adjusts. From equation (16), this the relative supply of skilled workers
can only happen if N h ⁄ N l changes. There- has been growing throughout the past
fore, in this economy, the skill bias of tech- sixty years, we expect technology to en-
nology has to adjust in order to “clear the dogenously respond by becoming more
technology market.” Combining (16) and skill-biased over time. If the elasticity
(18), we obtain equilibrium skill bias as of substitution between skilled and un-
ρ ⁄ (1 − ρ) skilled workers is greater than 2, i.e.,
Nh Ah H
= = . (19) ρ > 1 ⁄ 2, the increase in the demand for
N l Al L skilled workers would be more than
This equation shows that when ρ > 0, i.e., enough to offset the increase in the
when skilled and unskilled good are gross supply of skilled workers, and the econ-
substitutes, the market size effect will omy would be moving steadily along an
dominate the price effect, and a greater upward-sloping relative demand curve
relative supply of skilled workers will lead for skills. This would explain why re-
to more skill-biased technologies—higher turns to college have been increasing
N h ⁄ N l. over the past half century.
Finally, by substituting from equation A new theory for the acceleration in
(19), the skill premium in this economy skill bias also emerges from this simple
is model. According to this theory, the
(2ρ − 1) ⁄ (1 − ρ) σ−2 rapid increase in the supply of college
phN h H H educated workers during the 1970s cre-
ω= = =
p lN l L L ated a more pronounced shift toward
where the final expression is obtained by skill-biased technologies, further in-
combining (16) and (19). creased the demand for skill, and raised
The most important result is that if the college premium. This story be-
ρ > 1 ⁄ 2, i.e., if the elasticity of substitu- comes more interesting once we recog-
tion σ is greater than 2, the skill pre- nize that the equilibrium skill bias of
mium will be an increasing function of technologies, N h ⁄ N l, is a sluggish vari-
the relative supply of skills. 36 This is be- able determined by the slow buildup
cause an increase in H/L encourages so and development of new technologies.
much skill-biased technical change that In this case, a rapid increase in the sup-
the demand for skills increases more than ply of skills first reduces the skill pre-
enough to offset the increase in the mium as the economy moves along a
supply of skills. As a result, the (long- constant technology (constant N h ⁄ N l)
run) relative demand for skills is an up- curve as drawn in figure 7. After a while
ward-sloping curve as drawn in figure 7, the technology starts adjusting, and the
and an increase in the supply of skilled economy moves back to the upward-
workers increases the skill premium. sloping relative demand curve, with a
very sharp increase in the college pre-
36 The result that the elasticity of substitution mium. This theory therefore gives an
needs to be greater than 2 for the long-run rela- interpretation for both the decline in
tive demand to slope upwards is a feature of the
simple model here, and does not generalize to the college premium during the 1970s
richer environments. In any case, there are a num- and its subsequent surge, and relates
ber of estimates above 2, and a somewhat upward both to the large increase in the supply
sloping relative demand curve for skills, even with
this model’s parameterization, is an empirical of skilled workers.
possibility. For the key insights of this theory,
40 Journal of Economic Literature, Vol. XL (March 2002)
Relative Wage
Long-run Relative
Demand for Skills
Long-run Rel. Wage
Short-run Response
Relative Wage
Long-run Relative
Demand for Skills
Short-run Response
Cohen and Chang-Tai Hsieh 2000). of rural industry came to the cities.
This response suggests a change in Fourth, “there was a large influx of
the production structure toward more labor from Ireland” (p. 137). Finally,
skilled workers, consistent with the “technical changes in agriculture in-
theories outlined in this section. 39 creased the supply of labor available to
Despite this evidence showing simul- industry” (p. 137).
taneous increases in the supply of, and According to the endogenous tech-
demand for, skills in a number of episodes, nology hypothesis, this increase in the
it is difficult to distinguish exogenous supply of unskilled labor should encour-
and endogenous technical change. The age unskill-biased technical change. And
exogenous technical change theory as predicted by this approach, there
maintains that technical change is often were major skill-replacing (unskill-
skill-biased. Endogenous technical change biased) technologies introduced during
theory instead suggests that new tech- this period, most notably the factory
nologies should be skill-biased when system replacing tasks previously per-
the supply of skills increases. Since the formed by skilled artisans. Moreover, in
supply of skills has increased most of his classic study, Habakkuk argues that
the time over the past one hundred or the increase in the supply of labor was
so years, the implications of the two an important inducement to the devel-
theories are quite similar. The increase opment of factory methods. He also
in the supply of unskilled labor in the quotes an American historian, Handlin,
English cities during the early nine- to explain why the adoption of factory
teenth century provides an interesting methods in the United States was
contrasting event for the two ap- somewhat delayed. Handlin wrote:
proaches. Bairoch (1988, p. 245) de-
[N]o matter what degree of standard-
scribes this rapid expansion as follows: ization technical process of manufacturing
“. . . between 1740 and 1840 the popu- reached, the absence of a cheap labor supply
lation of England . . . went up from 6 precluded conversion to factory methods.
million to 15.7 million. . . . while the (p. 146)
agricultural labor force represented 60–
Habakkuk placed much more impor-
70% of the total work force in 1740, by
tance on the role of wages in determin-
1840 it represented only 22%.” Habak-
ing innovation decisions, a view that
kuk (pp. 136–37) also emphasizes the
later became known as the “Habakkuk
increase in the supply of unskilled labor
hypothesis.” But he also emphasized the
in English cities, and attributes it to
different availabilities of skilled labor in
five sources. First, enclosures released
Britain and the United States. He wrote:
substantial labor from agriculture. Sec-
ond, “population was increasing very [I]n both countries this provided manufac-
rapidly” (p. 136). Third, labor reserves turers with an incentive to adopt and devise
methods which replaced skilled by non-
skilled . . . [but ] . . . the English had a
39 Since Israel can be approximated by a small
stronger incentive than the Americans to
open economy, another possibility is a change in replace skilled by unskilled labor. (p. 152)
the output mix and trade patterns. Gandal, Han-
son, and Slaughter (2000) and Cohen and Hsieh
(2000) find no evidence for this, and show that With a similar reasoning to Habakkuk
demand for skills increased in all Israeli sectors. and Schmookler, the endogenous tech-
Cohen and Hsieh (2000) also argue that because nology view suggests that nineteenth-
many Russian immigrants initially worked in low-
skill occupations, the supply of skills to the Israeli century businessmen took advantage of
economy may not have increased by much. the rapid increase in the supply of labor
Acemoglu: Technical Change, Inequality, and the Labor Market 43
scale, improvements in the other sector ers. 43 In the basic framework of section
will not fully offset this decline, and 3, average wages always increase when
overall TFP growth will fall. 42 the supply of educated workers in-
Finally, it is useful to discuss briefly creases, and all wages should rise in re-
the response of skills to technology. sponse to an increase in the productiv-
The analysis so far treated the supply of ity of skilled workers, Ah. Yet, over the
skills as exogenous, and investigated the past thirty years the wages of low-skill
implications of the supply on the de- workers have fallen in real value, which
mand for skills. Naturally, the supply contrasts with their steady increase in
of skills will also respond to economic the previous thirty years.
incentives: more workers are likely to Models of faster technological prog-
acquire skills when skill premia are ress would naturally predict that un-
higher. Such supply choices can be eas- skilled workers should benefit from this
ily incorporated into this framework. faster progress. The endogenous tech-
Suppose, for example, that the relative nology approach discussed in the pre-
supply of skills, H/L, is an increasing vious subsection, on the other hand,
function of the skill premium, ω . In this predicts that there may be no improve-
case, if the long-run demand curve for ments in the technologies for unskilled
skills is upward-sloping, we can have workers for an extended period of time
an equilibrium path in which both the because skill-biased innovations are
relative supply of skills and the skill more profitable than unskill-biased in-
premium increase together over time novations. Yet in that case, their wages
(see Acemoglu 1998). This equilibrium should be stagnant or increase slowly,
configuration gives us an attractive in- but not fall.
terpretation for the joint behavior of Some of the studies mentioned above
college skills and the college pre- have suggested explanations for the fall
mium in the U.S. economy over the past in the wages of low-skill workers. For
sixty years (see figure 1): high returns example, recall that Galor and Moav
to schooling encourage education, (2000) argue that faster technological
which in turn induce more skill-biased change creates an “erosion effect,” re-
technical change, increasing returns to ducing the productivity of unskilled work-
schooling again. ers. Using equation (3) from above, in
the simplified version of their model
discussed in section 5.1, the unskilled
5.3 A Puzzle: The Decline in Wages
wage is w L = φl(g)a[1 + φρh(H ⁄ L)ρ](1 − ρ) ⁄ ρ,
of Low-Skill Workers
where the φl function captures the ero-
A common shortcoming of all the sion effect. The rate of growth of un-
pure technology approaches discussed skilled wages will be w⋅ L ⁄ w L = g(1 + εφ),
in this section is that they do not natu- where εφ is the elasticity of the φl func-
rally predict stagnant average wages tion which is negative by the assump-
and/or falling wages for unskilled work- tion that φ′l < 0. If this elasticity is less
than –1, an acceleration in economic
42 The view that too much effort toward im-
growth can reduce the wages of
proving the skill-biased technologies may be re-
lated to the TFP slowdown is consistent with the
pattern of sectoral TFP growth observed recently. 43 However, recall that if the increase in non-
As Gordon (1998) and Jorgensen and Stiroh (2000) wage benefits is taken into account, average wages
document, there has been rapid TFP growth in increased over this period. So the more robust fact
computer-producing sectors, but mediocre, or might be the fall in the real wages of low-skill
even disappointing, TFP growth in other sectors. workers.
Acemoglu: Technical Change, Inequality, and the Labor Market 45
low-skill workers due to a powerful and Green show that an increase in H/L
erosion effect. can raise inequality, and depress the
Acemoglu (1999a) and Caselli (1999) wages of low-skill workers. Although
derive a fall in the wages of less-skilled this is related to the effects of the in-
workers because the capital-labor ratio crease in the relative supply of skills on
for low-education/low-skill workers falls the path of technological progress dis-
as firms respond to technological devel- cussed in the last subsection, the mech-
opments. In Caselli’s model this hap- anism in Beaudry and Green’s paper is
pens because the equilibrium rate of quite different. The increase in H/L in-
return to capital increases, and in my creases the demand for capital, and
paper, this happens because firms de- pushes the interest rate up. This in-
vote more of their resources to opening crease in the interest rate hurts un-
specialized jobs for skilled workers. skilled workers more than skilled work-
Consider the following simple exam- ers because of the assumption that
ple to illustrate this point. There is a η < α.
scarce supply of an input K, which A potential problem with both the
could be capital, entrepreneurial talent Beaudry and Green and Caselli stories
or another factor of production. Skilled is that they explicitly rely on an increase
workers work with the production in the price of capital. Although the in-
function terest rates were higher during the
Yh = Aαh K1h − αH α, (20) 1980s in the U.S. economy, this seems
mostly due to contractionary monetary
while unskilled workers work with the policy, and related only tangentially to
production function inequality. Perhaps future research will
Yl = Aαl K1l − αLα, (21) show a major role for the increase in
where Kl and Kh sum to the total supply the interest rates in causing the decline
of K, which is assumed fixed. For sim- in the wages of low-education workers,
plicity, assume that Yl and Yh are perfect but as yet, there is no strong evidence
substitutes. In equilibrium, the marginal in favor of this effect. 44
product of capital in the two sectors has Overall, a potential problem for mod-
to be equalized, hence els based on technical change is to ac-
count for the decline in the wages of
Kl K − Kl low-skill workers. 45 I argue in the next
= .
A lL AhH section that the effect of technical
Therefore, an increase in Ah relative to change on the organization of the labor
Al will reduce Kl, as this scarce factor
44 Acemoglu (1999a), which is more in the spirit
gets reallocated from unskilled to skilled
of the organizational theories discussed below, ob-
workers. The wages of unskilled workers, tains the decline in the wages of unskilled workers
w L = (1 − α)Aαl K1l − αLα − 1, will fall as a through a change in the organization of produc-
result. tion, which also entails a reallocation of capital
away from them, but no increase in the rate of
An innovative version of this story is return to capital.
developed by Paul Beaudry and David 45 Another possibility is that some of the techno-
Green (2000). Suppose that equation logical developments of the past two decades have
been “truly labor-replacing,” for example, corre-
(21) above is replaced by Yl = Aηl K1l − ηLη, sponding to an increase in B l(t) or bt in terms of
with η < α, and K is interpreted as the production function in footnote 13. Autor,
physical capital. This implies that un- Levy, and Murnane (2000), for example, suggest
that computers have replaced unskilled routine
skilled workers are more “dependent” tasks. This possibility has not been extensively
on capital than skilled workers. Beaudry researched yet.
46 Journal of Economic Literature, Vol. XL (March 2002)
market both amplifies the effect of cause of the increase in inequality. In-
technology on wage inequality, and stead they have become powerful actors
provides a possible explanation for this only by interacting with technical
decline. change, amplified the direct effect of
technical change on inequality, and
6. Ramifications of Technical Change contributed to the fall in the wages of
low-skill workers.
This section discusses how technical 6.1 Organizational Change and
change can affect labor market prices Inequality
by transforming the organization of the
labor market. The idea that technology A variety of evidence suggests that
affects the organization of production, important changes in the structure of
and the institutions around it, is an old firms have been taking place in the U.S.
one. Marx put it in a dramatic fashion: economy over the past 25 years. More-
“The hand-mill gives you society with over, it seems clear that a major driving
the feudal lords; the steam-mill, society force for this transformation is changes
with the industrial capitalist.” The argu- in technologies (hence the view that
ment here is not as extreme, but re- technical change is essential for the
lated: recent technological developments changes in the organization of firms).
may have led to important changes in For example, team production and
the organization of production. other high-performance production
My focus here is on three sets of methods are now widespread in the
changes that could account for the fall U.S. economy (e.g., Casey Ichniowski,
in the wages of low-skill workers: the Giovanna Prennushi, and Kathryn
transformation of the organization of Shaw 1997, or Eileen Applebaum and
firms; change in labor market “insti- Rosemary Batt 1994). Similarly, Peter
tutions,” 46 particularly the decline in Cappelli and Steffanie Wilk (1997) show
unionization; and the interaction between that there has been an increase in the
international trade and technical change. screening of production workers, espe-
Organizational change often destroys cially from establishments that use
the types of jobs that pay high wages to computer technology and pay high
low-skill workers. Deunionization re- wages.
duces the bargaining power of low-skill Murnane and Levy (1996) report case
workers. And international trade with study evidence consistent with this
less developed countries (LDCs) in- view. From their interviews with human
creases the effective supply of unskilled resource personnel at a number of com-
labor and depresses the marginal value panies, they describe the change in the
product of less skilled workers in the hiring practices of U.S. companies. A
U.S. economy. Therefore, all three manager at Ford Motor company in
changes could be responsible for the 1967 describes their hiring strategy as
changes in the U.S. wage structure and follows: “If we had a vacancy, we would
for the decline in the wages of low-skill look outside in the plant waiting room
workers. Nevertheless, I argue that these to see if there were any warm bodies
factors by themselves are not the major standing there. If someone was there
and they looked physically OK and
46 I am using the term institutions loosely here,
weren’t an obvious alcoholic, they were
to capture the rules of the game in the labor mar-
ket, patterns of bargaining, as well as government hired” (p. 19). In contrast, comparable
labor market policy. companies in the late 1980s use a very
Acemoglu: Technical Change, Inequality, and the Labor Market 47
0.38
0.375
0.37
Weight-at-the-tails
0.365
0.36
0.355
0.35
1983 1985 1987 1989 1991 1993
Year
Figure 9. The Evolution of the Percentage of Employment in the Top and Bottom 25 Percentile Industry-
Occupation Cells (weight-at-the-tails of the job quality distribution)
and Gilles Duranton (2001). Kremer mulation implies that if the productivity
and Maskin consider a production func- (ability) of unskilled workers, Al, is very
tion which distinguishes between man- low relative to Ah, they pull down the
agers and workers. They show that a productivity of skilled workers. In
change in technology or an increase in contrast, when they work in separate
the dispersion of skills may encourage firms, skilled workers are unaffected by the
high-skill workers to match with other productivity of unskilled workers. More-
high-skill workers, rather than work as over, β > 1, which implies that improve-
managers in establishments employing ments in the productivity of skilled work-
low-skill workers. ers has more effect on the productivity
Here I outline a simple model, syn- of new-style organizations. The parame-
thesizing Kremer and Maskin (1999) ters Bp and Bs capture the relative effi-
and Acemoglu (1999a), that captures ciency of old and new-style production
the effect of the technical change on functions.
the organization of production, and via The labor market is competitive, so
this channel, on wage inequality. The the equilibrium organization of produc-
basic idea is simple. As the productivity tion will maximize total output, given
of skilled workers increases, it becomes by Bp[(AlL)ρ + (AhhO)ρ]1 ⁄ ρ + BsAβh(H − hO),
more profitable for them to work by where hO ∈ [0, H] is the number of
themselves in separate organizations skilled workers employed in the old-style
rather than in the same workplace as organizations. For all cases in which
the unskilled workers. This is because hO > 0, the solution to this problem will
when the skilled and the unskilled work involve
together, their productivities interact,
and unskilled workers may put downward w H = BpAρh hρO − 1[Aρl Lρ + Aρh hρO ](1 − ρ) ⁄ ρ (22)
β
pressure on the productivity of skilled = B sA h ,
workers (for example, because unskilled i.e., skilled workers need to be paid BsAβh
workers have to implement part of the to be convinced to work in the same
production process designed by skilled firms as the unskilled workers. The
workers). unskilled wage is
Specifically, suppose that firms have
access to the following production ρ ρ ρ ρ
w L = BpAl Lρ − 1[Al Lρ + Ah hO ](1 − ρ) ⁄ ρ (23)
functions
< wH.
the old-style production function: Now consider an increase in Ah. Dif-
Y = Bp[(AlL)ρ + (AhhO )ρ]1 ⁄ ρ, ferentiating (22) yields ∂hO ⁄ ∂Ah < 0, that
the new-organization production function: is, there will be fewer skilled workers
β working with the unskilled. Moreover,
Y = B sA h h N ,
differentiation also gives ∂(AhhO) ⁄ ∂Ah < 0,
where hO is the number of skilled work- so the efficiency units of skilled workers
ers employed in the old-style firms, and that the unskilled work with declines.
hN is the number of skilled workers em- From (23), this implies that dw L ⁄ dAh < 0.
ployed in new organizations separately Therefore, skill-biased technical change
from unskilled workers. The fact that encourages skilled workers to work by
when they are employed in the same themselves, and as a result, unskilled
firm these two types of workers affect wages fall. Intuitively, because, in the
each other’s productivity is captured by old-style organizations, the productiv-
the CES production function. This for- ity of skilled workers depends on the
Acemoglu: Technical Change, Inequality, and the Labor Market 49
ability of unskilled workers, when the this evidence does not yet enable an as-
skilled become even more productive, sessment of whether changes in organi-
the downward pull exerted on their pro- zational forms have been an important
ductivity by the unskilled workers be- contributor to the changes in labor
comes more costly, and they prefer to market prices, and future research is
work in separate organizations. This re- required to determine the role of
duces the ratio AhhO ⁄ L and depresses organizational change in the rise in
unskilled wages. As a result, improve- inequality.
ments in technology, which normally
6.2 Institutional Change
benefit unskilled workers as in section
3, may hurt unskilled workers because Labor market “institutions,” includ-
they transform the organization of ing minimum wage laws, the impor-
production. tance of collective bargaining in wage
An increase in Bs ⁄ Bp, which raises the determination, and perhaps social
relative profitability of the new organi- norms, undoubtedly have an important
zational form, also leads to further seg- effect on the distribution of wages. The
regation of skilled and unskilled work- Great Compression in the wage distri-
ers in different organizations. This last bution after the Second World War is
comparative static result is useful since difficult to explain without invoking
Bresnahan (1999) and Autor, Levy and changes institutions and social norms
Murnane (2000) argue that by replacing (see, e.g., Goldin and Robert Margo
workers in the performance of routine 1992). Could changes in labor market
tasks, computers enabled a radical change institutions also account for the in-
in the organization of production. 47 crease in wage inequality and the dis-
This is reminiscent of a technological continuity in that demand for skills
change that makes the new-organization during the past decades?
production function more profitable. Two major changes in labor market
These organizational stories are at- institutions over the past 25 years are
tractive since they provide a unified ex- the decline in the real value of state and
planation for the changes in the wage federal minimum wages and the reduced
structure and the apparent changes in importance of trade unions in wage de-
the organization of firms. An interesting termination. Although many economists
recent paper by Eve Caroli and Van suspect that these institutional changes
Reenan (1999) provides evidence sug- may be responsible for the changes in
gesting that changes in wages have been the structure of the U.S. labor market
accompanied by changes in organi- (see Freeman 1991; DiNardo, Fortin,
zational forms. Acemoglu (1999a) and and Lemieux 1995; Lee 1999), I will
Kremer and Maskin (1999) also provide argue that these changes are unlikely
evidence suggesting a number of orga- to be the major cause of the recent
nizational changes in the U.S. economy increase in U.S. wage inequality.
during the past 25 years. Nevertheless, The real value of the minimum wage
was eroded throughout the 1980s as the
47 A related perspective is offered by Aghion
(2001), who also argues that computers replace
nominal minimum wage remained con-
unskilled tasks. He suggests that computers are a stant for much of this period. Since the
“general-purpose technology,” so their diffusion minimum wage is likely to increase the
follows an inverted S shaped pattern. He sug- wages of low-paid workers, this decline
gests that as more and more firms adopted com-
puters over the past decades, demand for unskilled may be responsible for increased wage
workers fell rapidly. dispersion. DiNardo et al. (1995) and
50 Journal of Economic Literature, Vol. XL (March 2002)
where H and L denote the supplies of since the producers face the same rela-
skilled and unskilled labor in the United tive price of skill-intensive goods, and
States. The skill premium is then simply have access to the same technologies.
equal to the ratio of the marginal value Before trade, however, the skill pre-
products of the two types of workers, mium in the LDCs was ω ^=p ^Ah ⁄ Al,
that is, ω US = pUSAh ⁄ Al. Next, suppose where p ^⁄AL
^ = (AhH ^)ρ − 1 is the relative
l
that the United States starts trading with price of skill-intensive goods in the
a set of LDCs that have access to the LDCs before trade. The same argument
same technology as given by Ah and Al, as above implies that p ^ > pW , i.e., trade
but are relatively scarce in skills. Denote with the skill-abundant United States re-
the total supplies of skilled and unskilled duces the relative price of skill-intensive
workers in the LDCs by H ^ and L ^ where goods in the LDCs. This implies that
^ ^
H ⁄ L < H ⁄ L, which simply reiterates that ωW < ω^; after trade wage inequality
the United States is more abundant in should fall in the LDCs.
skilled workers than the LDCs. Although in theory increased trade
After full trade opening, the product with the LDCs can be the cause of the
markets in the United States and the rapid increase in the demand for skills,
LDCs are joined, so there will be a most evidence suggests that the direct
unique world relative price. Since the effect of increased international trade
supplies of skill- and unskill-intensive on the U.S. labor market has been rela-
goods are Ah(H + H ^ ) and A (L + L ^), the tively minor. First, as equation (27)
l
relative price of the skill-intensive good shows, the effect of international trade
will be works through a unique intervening
^ ) ρ − 1 mechanism: more trade with the LDCs
Ah(H + H increases the relative price of skill-
p =
W
^) < pUS. (27)
A l (L + L intensive goods, p, and affects the skill
premium via this channel. In fact, in
The fact that pW > pUS follows immedi-
^⁄L ^ < H ⁄ L. Intuitively, once this simple framework, the percentage
ately from H
increase in the skill premium is propor-
the United States starts trading with
tional to the percentage increase in the
skill-scarce LDCs, demand for skill-
relative price of skill-intensive goods.
intensive goods increases and pushes the
Perhaps the most damaging piece of
prices of these goods up.
evidence for the trade hypothesis is that
Labor demand in this economy is de-
most studies suggest the relative price
rived from product demands. The skill
of skill-intensive goods did not increase
premium therefore follows the relative
over the period of increasing inequality.
price of skill-intensive goods. After
Robert Lawrence and Slaughter (1993)
trade opening, the U.S. skill premium
found that during the 1980s the relative
increases to
price of skill-intensive goods actually
Ah
ωW = pW > ω US (28) fell. Jeffrey Sachs and Howard Shatz
Al (1994) found no major change or a
where the fact that ω W > ω US is an imme- slight decline. A more recent paper by
diate consequence of pW > pUS. There- Krueger (1997) criticized the methods
fore, trade with less developed countries and data used by these studies, and
increases wage inequality in the United found an increase in the relative price
States. of skill-intensive goods. Nevertheless,
The skill premium in the LDCs will the increase in these prices is relatively
also be equal to ω W after trade opening small, so would not be able to account for
54 Journal of Economic Literature, Vol. XL (March 2002)
the large increase in the skill premium the same point by showing that the con-
experienced in the U.S. economy. tent of unskilled labor embedded in the
Second, with trade as the driving U.S. imports is small relative to the
force, increased production of skill- changes in the supply of skills taking
intensive goods should be drawing place during this period. 51
workers away from other sectors. In Although the above arguments sug-
contrast, as documented by Murphy gest that increased international trade
and Welch (1993), Berman, Bound, and with the LDCs is not the major cause of
Griliches (1994) and Autor, Katz, and the changes in the wage structure by it-
Krueger (1998), all sectors, even those self, they do not rule out a powerful ef-
producing less-skilled goods, increased fect of international trade when it inter-
their demands for more-educated work- acts with technical change. In a world
ers. This pattern is not consistent with with endogenous technical change, in-
trade being the main driving force of creased international trade could affect
the increase in the demand for skilled the types of technologies developed and
workers (though one has to bear in adopted by firms, and have a large ef-
mind the increase in outsourcing in fect through this channel. This possibil-
interpreting this fact; see Robert ity was first raised by Wood (1994), who
Feenstra and Hanson 1999). argued that trade with the LDCs will
Third, a direct implication of the lead to defensive skill-biased innova-
trade view is that, as shown above, tions. Wood, however, did not develop
while demand for skills and inequality the mechanism through which such de-
increased in the United States, the con- fensive innovations could occur. I now
verse should have happened in the illustrate how trade causes skill-biased
LDCs that have started trading with technical change using the endogenous
the more skill-abundant U.S. economy. The technology model developed in section
evidence, however, suggests that more 5.2 (this analysis draws on Acemoglu
of the LDCs experienced rising in- 1999b).
equality after opening to international Suppose that the United States starts
trade (see Hanson and Ann Harrison trading with the LDCs as discussed
1994; or Donald Robbins 1995). Al- above, and assume that the LDCs al-
though the increase in inequality in a ways use U.S. technologies. Therefore,
number of cases may have been due to the supply of skilled and unskilled
concurrent political and economic re- goods in the LDCs is Yh = AhH ^ and
forms, the preponderance of evidence ^ ^ ^
Yl = AlL where as before H ⁄ L < H ⁄ L.
is not favorable to this basic implication The immediate effect will be an
of the trade hypothesis. increase in the relative price of
Finally, a number of economists have skill-intensive goods as illustrated by
pointed out that U.S. trade with the
51 This is probably the weakest criticism against
LDCs is not important enough to have a
the trade view, and many studies have pointed out
major impact on the U.S. product mar- how international trade could have a larger effect
ket prices and consequently on wages. on U.S. labor market prices in the presence of la-
Paul Krugman (1995) illustrates this bor market rents. For example, George Borjas and
Valerie Ramey (1995), Dani Rodrik (1997), and
point by undertaking a calibration of a Dube and Reddy (1999) have argued that the
simple North-South model. Katz and threat of international trade may reduce wages,
Murphy (1992), Berman, Bound, and especially in sectors with substantial rents, and
this change in bargaining power may affect the
Griliches (1994) and George Borjas, earnings of unskilled workers more, increasing
Freeman, and Katz (1997) emphasize inequality.
Acemoglu: Technical Change, Inequality, and the Labor Market 55
equation (27). Now, recall from the librium price of skill-intensive goods
analysis in section 5.2 that there is a cannot change either. Combining equa-
relative price effect on the direction of tions (18) and (27) gives the post-trade
technical change (because developing skill bias of technology as
technologies to produce the more ex-
AW (H + H^ ) −1 H 1 ⁄ (1 − ρ)
pensive good is more profitable). There- h
fore, trade, by making the skill-intensive = ^) L
AW ( L + L
l
goods more expensive, encourages more
ρ ⁄ (1 − ρ)
skill-biased technical change. AUS
h H
To determine exactly how the direc- > =
AUS
l L
tion of technical change will be affected
where AUSh ⁄ Al
US
by trade, we need to know the market is the pre-trade skill bias
sizes for new technologies after trade of technology in the United States.
opening. It is plausible to assume that The implication is that when the di-
trade opening with the LDCs will not rection of technical change is endoge-
have a major effect on the enforcement nous, trade between the United States
of intellectual property rights in the and the LDCs will induce skill-biased
South. In that case, trade opening will technical progress. The result is not
induce skill-biased technical change in only that trade leads to an increase in
the United States. Specifically, as long skill premia, but that this can happen
as after trade opening the United States without the counterfactual implications
does not start producing technologies of the standard trade models discussed
for unskilled workers in the LDCs, the above.
relative market sizes for the two types The first implication of this induced
of technologies remain at H/L. This im- skill bias is that the impact of trade on
plies that the technology market clear- labor markets may be much larger than
ing condition, equation (18), no longer predicted by the standard trade models,
holds. In particular, since pW h H > pl L
W which helps against the criticism that
from equation (27), there will now only the amount of trade the United States
be incentives for skill-biased technical undertakes with the LDCs is not large
change. This process continues until enough. Second, because trade causes
pW = pWh ⁄ p l = (H ⁄ L) , so that incentives
W −1 skill-biased technical change, the fact
to develop the two different types of that all sectors have increased the em-
technologies are balanced. This implies ployment of skilled workers is consis-
that the skill bias of technical change is tent with trade being the underlying
still determined by equation (18) from cause of the increase in inequality.
section 5.2, i.e., by U.S. domestic rela- Third, for the same reason, there is a
tive supplies alone. Intuitively, the rela- force counteracting the decline in in-
tive price of skill-intensive goods plays equality in the LDCs implied by trade:
two roles in this model. The first is to these economies use U.S. technologies,
clear the market for goods (i.e., equa- which are becoming more skill-biased.
tion 27), and the second is to ensure Finally, and quite strikingly, trade
equilibrium in the technology market leaves the relative price of skill-intensive
(cfr. equation 18). Since the technology goods in the United States unchanged
market clearing condition relates the in the long-run. Recall that changes in
relative price of skill-intensive goods to relative prices are the usual intervening
the relative supplies in the U.S. market, mechanism in trade models, so a num-
which do not change, the long-run equi- ber of studies have concluded that trade
56 Journal of Economic Literature, Vol. XL (March 2002)
has been argued by Piore and Sabel 1970s. Therefore, a mechanism that
(1984), and more recently by Aghion, could lead to differential behavior in
Howitt, and Violante (2000) and Gould, the prices to observed and unobserved
Moav, and Weinberg (2000). Violante skills is still necessary. 54
(2000) offers an alternative, but related
theory, where increased churning is 7.4 A Two-Index Model
driven by the greater productivity gap of Residual Inequality
between different firms (because of
Since models based on a single index
faster embodied technical change) and
of skill (or models where different types
increased skill dynamics of ex ante
of skills are perfect substitutes) are in-
identical workers (which he contrasts
consistent with the differential behavior
with the argument that it is innate abil-
of returns to schooling and within-group
ity differences that matter). According
inequality during the 1970s, an obvious
to all these approaches, an increase in
next step is to consider a two-index
inequality results from more rapid tech-
model where observed and unobserved
nical change, not because of skill bias
skills are imperfect substitutes. There
but because of increased “churning” in
are good reasons to expect that in the
the labor market. Aghion, Howitt, and
real world skills are multidimensional.
Violante (2000), for example, suggest
For example, the social psychologist
that only some workers will be able to
Howard Gardner (1988) makes a strong
adapt to the introduction of new tech-
case that we should always think of
nology, and this will increase wage
skills as multidimensional, and that the
inequality.
standard IQ measures fail to capture
An advantage of this approach is that
this multidimensionality. There is a
it is in line with the increased earnings
long tradition in economics building on
instability pointed out by Gottschalk
the Roy model which uses models with
and Robert Moffit (1994). However,
multidimensional skills to analyze wages
there is relatively little evidence, other
and returns to schooling (e.g., Robert
than this increase in earnings instabil-
Willis and Sherwin Rosen 1975). In the
ity, supporting the notion that there is
context of the determinants of earnings,
more churning in the labor market. The
a recent paper by Bowles, Gintis, and
data on job creation and job destruction
reported by Steven Davis, John Halti- 54 An interesting theory similar to the churning
wanger, and Scott Schuh (1996) shows models that could lead to such a differential be-
havior is advanced by Galor and Tsiddon (1997).
no increase in job reallocation during They draw a distinction between ability and edu-
the 1980s or the early 1990s, and most cation, and argue that returns to ability increase
evidence does not indicate much of a faster during periods of rapid technological
change. If we view the 1970s as a period of rapid
decline in job stability over this period technological change, as suggested above, this the-
(e.g. Francis Diebold, David Neumark, ory would imply an increase in the returns to abil-
and Daniel Polsky 1997; or Henry ity (unobserved skills) during this period. Never-
theless, this explanation is still not consistent with
Farber 1995). 53 Also theories based on the facts because high-ability individuals are more
churning do not naturally predict a di- likely to be high education, so rapid technological
vergence between returns to education progress should also increase returns to schooling.
Perhaps a combination of this mechanism with dif-
and residual inequality during the ferential sorting into education, or with imperfect
substitution between high- and low-education
53 More recent evidence indicates that there workers, might be able to account for the diver-
may have been a decrease in job tenure during the gence between returns to schooling and residual
later parts of the 1990s (see Neumark, Polsky, and inequality during the 1970s, but such a model has
Daniel Hansen 1999). not been developed yet.
Acemoglu: Technical Change, Inequality, and the Labor Market 59
Overall, single index models are not substantially in the United States and
capable of explaining the changes in re- the United Kingdom, but remained
sidual inequality over the past thirty fairly stable in many continental Euro-
years, and we do not yet know how im- pean economies (see for example Davis
portant various factors are. Analysis of 1995; Gottschalk and Timothy Smeeding
the determinants of residual inequality 1999).
and the reasons why there was an explo- The standard explanation for this
sion in overall inequality beginning in divergent behavior, succinctly summa-
the 1970s remains a major research rized by Krugman (1994) and OECD
area. (1994), and sometimes referred to as
the Krugman hypothesis, maintains that
8. Cross-Country Patterns inequality did not increase as much (or
not at all) in Europe because labor mar-
So far, I have focused on U.S. wage ket institutions there encourage wage
inequality patterns and on the incen- compression, limiting the extent of in-
tives to develop new technologies com- equality. This can be captured in the
ing from the U.S. supply of skills. The competitive framework of section 3,
cross-country dimension presents a where firms are always along their rela-
number of challenges, in particular be- tive demand curve, by assuming that
cause it is difficult to explain why in- labor market institutions impose an ex-
equality increased much more in some ogenous skill premium ω − = w ⁄ w . This
H L
countries than others. In addition, for implies:
the endogenous technology view, it is ρ ⁄ (1 − ρ)
important to know whether it is the H Ah − −1 ⁄ (1 − ρ). (30)
= ω
relative supply of skills in each country l Al
or in the world as a whole that deter-
mines the direction of technical change. where the level of employment of un-
I now briefly discuss these issues. skilled workers, l, will generally be less
8.1 Differences in Inequality Patterns than their labor supply L because of
wage compression. A more compressed
Although the tendency toward wage structure—i.e., a lower ω − —will in-
greater inequality has been a feature in crease the unemployment of unskilled
many developed and less developed workers, given by L − l.
countries (see Freeman and Katz 1995; The view that wages are more com-
and Berman and Machin 2000), there pressed in Europe clearly has some
are also marked differences in the be- merit. Francine Blau and Lawrence
havior of within- and between-group in- Kahn (1995) show that the major differ-
equality across these countries. Katz, ence in overall inequality between the
David Blanchflower, and Gary Loveman United States and many continental
(1995), Murphy, Riddell, and Romer European economies is not in the 90–
(1998), and Card and Lemieux (2000) 50 differential, but in the 50–10 differ-
show that the differential behavior of ential. This suggests that the minimum
the supply of skills can go a long way wage, strong unions, and generous
toward explaining the differences in transfer programs in Europe are in
the returns to schooling, especially be- part responsible for the relative wage
tween the United States, Canada, and compression in Europe.
the United Kingdom. Nevertheless, it is Nevertheless, the Krugman hypothe-
puzzling that wage inequality increased sis runs into two difficulties. First, unless
Acemoglu: Technical Change, Inequality, and the Labor Market 61
firms can either produce with some productivity of unskilled workers (see
existing technology, a, or upgrade to a Acemoglu and Pischke 1999 for this
superior technology, a′ = a + α, at cost γ. argument in the context of training).
The profit to upgrading the technology As long as the cost of upgrading to
used by a skilled worker is (1 − β)αη − γ, the new technology, γ, is small, i.e., less
both in the United States and Europe. than γU , firms will upgrade both with
The new technology will therefore be skilled and unskilled workers in the
adopted when United States and Europe. In this case,
cross-country inequality levels will be
γ ≤ γS ≡ (1 − β)αη. stable. This corresponds to the situation
Note that there is a holdup problem, dis- in the 1950s and the 1960s. In contrast,
couraging upgrading: a fraction β of the if γ is high, for example, because the
productivity increase accrues to the technological improvements of the 1980s
worker due to rent sharing (Paul Grout are more expensive to implement, there
1984; Acemoglu 1996). may be a divergence in inequality be-
The incentives to upgrade the tech- tween the two economies. For instance,
nology used by unskilled workers, on if γ ∈(γU ,α), then new technology will not
the other hand, differ between the be adopted with unskilled workers in
United States and Europe. In the the United States, but it will be used
United States, this profit is given by with unskilled workers in Europe. As a
(1 − β)α − γ. So, the new technology will
result, while wage inequality increases
be adopted with unskilled workers if in the United States, it will remain
stable in Europe. Therefore, a simple
γ ≤ γU ≡ (1 − β)α. story for cross-country differences in
inequality trends emerges from this
Clearly, γU < γS, so adopting new tech- model: wage compression encourages
nologies with skilled workers is more the use of more advanced technologies
profitable. The returns to introducing with unskilled workers, and acts to rein-
the new technology are different in force itself in Europe. In contrast, tech-
Europe because the minimum wage is nological developments can harm the
binding for unskilled workers. To sim- earnings of low-skill U.S. workers who
plify the discussion, suppose that even are not protected by this type of wage
after the introduction of new technology, compression. Whether the interaction
the minimum wage binds, i.e., between wage compression and tech-
w
− > β(A + α) . Then, the return to intro- nology choice could be important in ex-
ducing the new technology in Europe plaining European inequality and un-
with unskilled workers is α − γ, and firms employment patterns is an area for
will do so as long as γ < α. Since α > γU , future study.
firms in Europe have greater incentives
8.2 International Determinants
to introduce advanced technologies with
of Technology
unskilled workers than in the United
States. This is because the binding mini- The endogenous technology frame-
mum wage in Europe makes the firm the work developed above links the skill
full residual claimant of the increase in bias of technology to the relative supply
the productivity of unskilled workers. of skills. There are a number of inter-
This highlights that in an economy with a esting and difficult issues that arise
compressed wage structure, firms may when we consider the international di-
have a greater incentive to increase the mension. Here I simply mention some
Acemoglu: Technical Change, Inequality, and the Labor Market 63
TABLE A1
ANNUALIZED CHANGES IN OVERALL AND RESIDUAL WAGE INEQUALITY (FROM KATZ AND AUTOR)
Note: The numbers give 10 × annualized changes from Table 4 of Katz and Autor (2000). 90–10 is the difference
between the 90th and 10th percent of the log wage or residual distribution, and 50–10 is the difference between the
median and 10th percent of the corresponding distribution. The residuals are estimated from log earnings regres-
sions with nine education dummies, a quartic in experience and their interactions. See notes to Tables 3 and 4 in
Katz and Autor (2000).
and the experience controls. The sample includes sources: decennial censuses, and March CPSs and
all full-time full-year workers between the ages of May CPSs (and later Outgoing Rotation Group
18 and 65, and except those with the lowest 1 per- files—ORGs). These numbers show no significant
cent earnings. Earnings for top coded observations change in residual or overall inequality during the
are calculated as the value of the top code times 1960s, and consistent increases in inequality from all
1.5. The relative supply of skills is calculated from sources during the 1970s and the 1980s. For example,
a sample that includes all workers between the the data from the Census and the March CPSs indi-
ages of 18 and 65. It is defined as the ratio of cate that the 90–10 differential increased about 0.10 a
college equivalents to non-college equivalents, cal- year between 1970 and 1979, while the 50–10 dif-
culated as in Autor, Katz, and Krueger (1998) ferential increased by about 0.11 a year during the
using weeks worked as weights. In particular, col- same period. The May CPS data show a smaller
lege equivalents = college graduates + 0.5 × work- increase in the 90–10 differentials during this pe-
ers with some college, and noncollege equivalents = riod, but a comparable increase in the 50–10 dif-
high school dropouts + high school graduates + 0.5 × ferential. Overall, although there is less uniformity
workers with some college. among data sources regarding the behavior of re-
Samples used for overall and residual wage in- sidual inequality than returns to schooling (see
equality include only white male full-time full year Katz and Autor 2000), there is considerable evi-
workers between the ages of 18 and 65, and ex- dence that residual and overall inequality started
clude those earning less than half the real value to increase during the 1970s.
of the 1982 minimum wage converted from nomi-
nal dollars using the personal consumption expen- A3. Can Composition Effects Explain
diture deflator (see Katz and Autor 2000). Earn- Inequality Changes?
ings for top coded observations are calculated as A possible explanation for the patterns we ob-
the value of the top code times 1.5. serve could be changes in the distribution of un-
A2. The Behavior of Overall Inequality observed skills— or more concretely, composition
effects. For example, the average ability of workers
During the 1970s
with high education may have increased relative to
In an important paper on the effect of labor that of workers with low education over time.
market institutions on inequality, DiNardo, Here, I document that the increase in the returns
Fortin, and Lemieux (1995) provide evidence sug- to education and residual inequality are not smply
gesting that in the May CPSs, there is no increase due to composition effects. Note first that compo-
in inequality during the 1970s. In table A1, I dis- sition effects cannot by themselves explain the re-
play numbers from the survey by Katz and Autor cent changes in inequality: as noted in subsection
(2000), who report changes in residual inequality 7.2, composition effects suggest that inequality
for the past four decades from three different among educated and uneducated workers should
66 Journal of Economic Literature, Vol. XL (March 2002)
TABLE A2
COMPOSITION EFFECTS
Born in 19– 06–10 11–15 16–20 21–25 26–30 31–35 36–40 41–45 46–50 51–55
Year ↓ →
Panel A
1950 1.448 1.370 1.175 1.093
1960 1.551 1.564 1.525 1.421 1.303 1.132
1970 1.680 1.656 1.613 1.539 1.392 1.153
1980 1.567 1.560 1.538 1.402 1.222 1.063
1990 1.798 1.761 1.723 1.674
Panel B
∆ ln ω 50−60 0.103 0.194 0.350 0.328
∆ ln ω 60−70 0.155 0.234 0.311 0.407
∆ ln ω 70−80 –0.047 0.021 0.146 0.249
∆ ln ω 80−90 0.260 0.359 0.500 0.611
Panel C
∆ 2 ln ω50−70 0.051 0.040 –0.040 0.079
∆ 2 ln ω60−80 –0.201 –0.213 –0.165 –0.158
∆ 2 ln ω70−90 0.307 0.338 0.354 0.362
Note: The top panel gives the college premium from the census indicated at the beginning of the row for cohorts
born in the five-year intervals indicated at the head of the column. For example, the first number is for individuals
born between 1906–10 from the census of 1950. The college premium is defined as the wages of workers from that
cohort with a college degree or more divided by the wages of workers from that cohort with twelve years of
schooling. The bottom panel gives the change in the college premium for a given cohort between the two indicated
dates and the difference between the wage growth of two neighboring cohorts as indicated by equations (34) and
(35). All data are from the decennial censuses for white males born in the United States.
move in opposite directions. This suggests that Consider changes in cohort quality first. If, as
changes in the true returns to skills have played at many claim, the U.S. high school system has be-
least some role in the changes in inequality. come worse, we might expect a decline in A 0t with-
More generally, to get a sense of how important out a corresponding decline in A 1t. As a result,
composition effects may be, consider a variant of A 1t − A 0t may increase. Alternatively, as a larger
equation (13) above with two education levels, high fraction of the U.S. population obtains higher edu-
h = 1 and low h = 0, and suppose wages are given by cation, it is natural that selection into education
(i.e., the abilities of those obtaining education)
ln w it = a i + γth i + εit (31) will change. It is in fact possible that those who
are left without education could have very low un-
where h i is a dummy for high education, ai is un- observed ability, which would translate into a low level
observed ability, and εit is a mean zero disturbance of A 0t, and therefore into an increase in A 1t − A 0t.
term. Define the (log) education premium—the Although these scenarios are plausible, theoret-
difference between the average wages of high and ically the opposite can happen as well. For exam-
low education workers—can be written as ple, many academics who have been involved in
the U.S. education system for a long time com-
ln ω t ≡ E(ln w it | h i = 1) − E(ln w it | h i = 0)
plain about the decline in the quality of universi-
= γt + A 1t − A 0t ties, while the view that American high schools
where A 1t ≡ E(ai | h i = 1) and A 0t is defined simi- have become much worse is not shared universally
larly. The increase in the education premium can (e.g., Krueger 1998). The selection argument is
be caused by an increase in γt (a true increase in also more complicated than it first appears. It is
the returns to skills) or an increase in A 1t − A 0t. true that, as long as those with high unobserved
There are basically two reasons for an increase in abilities are more likely to obtain higher educa-
A 1t − A 0t: (1) changes in cohort quality, or (2) tion, an increase in education will depress A 0t. But
changes in the pattern of selection into education. it will also depress A 1t. To see why, assume that
Acemoglu: Technical Change, Inequality, and the Labor Market 67
there is perfect sorting—i.e., if an individual with
ability a obtains education, all individuals with TABLE A3
ability a′ > a will do so as well. In this case, there CHANGES IN INEQUALITY BY COHORT
will exist a threshold level of ability, a−, such that (FROM JUHN ET AL. 1993)
only those with a > a− obtain education. Next con-
sider a uniform distribution of ai between b0 and
b0 + b1 . Then,
Panel A: 90–10 Differentials for Log Weekly Wages
1 a− a− + b0 Year of
A0 = −
a − b0
∫b0 ada = 2 market entry 1964 1970 1976 1982 1988
and 1983–88 1.38
1 b0 + b1 b0 + b1 + a− 1977–82 1.27 1.38
A1 = ∫
b1 − b0 − a− a−
ada =
2
. 1971–76 1.13 1.24 1.38
1965–70 1.08 1.12 1.29 1.42
So both A 0 and A 1 will decline when a− decreases to 1959–64 1.13 1.01 1.13 1.30 1.40
a− ′. Moreover, A 1 − A 0 = b1 ⁄ 2, so it is unaffected by 1953–58 1.02 1.07 1.16 1.32 1.43
the decline in a−. Intuitively, with a uniform distri- 1947–52 1.02 1.11 1.15 1.30
bution of ai, when a− increases, both A 0 and A 1 fall 1941–46 1.02 1.07 1.16
by exactly the same amount, so the composition
effects have no influence on the education pre- 1935–40 1.06 1.09
mium. Clearly, with other distributions of ability, 1929–34 1.09
this extreme result will no longer hold, but it re- Panel B: 90–10 Differentials for Log Wage Residuals
mains true that both A 0 and A 1 will fall, and
whether this effect will increase or decrease the Year of
education premium is unclear. Overall, therefore, market entry 1964 1970 1976 1982 1988
the effects of changes in composition on education
premia is an empirical question. 1983–88 1.09
Empirically, the importance of composition ef- 1977–82 1.06 1.16
fects can be uncovered by looking at inequality 1971–76 .96 1.09 1.18
changes by cohort (see McKinley Blackburn, 1965–70 .86 .96 1.12 1.23
David Bloom, and Freeman 1992; Juhn, Murphy, 1959–64 .92 .86 .98 1.12 1.21
and Pierce 1993). To see this, rewrite equation
1953–58 .88 .91 .99 1.15 1.26
(31) as
1947–52 .89 .94 .99 1.14
ln w ict = a ic + γth ic + εcit (32) 1941–46 .94 .94 1.05
1935–40 .95 .98
where c denotes a cohort—i.e., a group of indi-
viduals who are born in the same year. I have im- 1929–34 .99
posed an important assumption in writing equa-
tion (32): returns to skills are assumed to be the Note: This table replicates Table 3 of Juhn, Murphy,
same for all cohorts and ages; γt—though clearly and Pierce (1993). The top panel reports the 90–10
they vary over time. We can now define cohort differential for log weekly wages of the cohorts that
specific education premia as
have entered the labor market in the corresponding
ln ω ct ≡ E(ln w ict | h i = 1) − E(ln w ict | h i = 0) six-year interval. Panel B gives the 90–10 differential
= γt + A 1ct − A 0ct for the residuals from a regression of log weekly wages
on education controls.
where A 1ct ≡ E(aic | h i = 1) and A 0ct is defined simi-
larly. Under the additional assumption that there
is no further schooling for any of the cohorts year t, and that γst = γs + γt (this assumption is
over the periods under study, we have also not necessary, but simplifies the discussion).
ln ω ct = γt + A 1c − A 0c, which implies Then ∆ ln ω c,t′ − t = γs′ − γs + γt′ − γt, where obviously
s′ − s = t′ − t. Now consider a different cohort, c′′
∆ ln ω c,t′ − t ≡ ln ω ct′ − ln ω ct = γt′ − γt, (33) that is age s′ in the year t and age s in the year t′′.
Then ∆ ln ω c′′,t − t′′ = γs′ − γs + γt − γt′′. So, the true
i.e., changes in the returns to education within a change in the returns to skills between the dates t′′
cohort will reveal the true change in the returns. and t′ is
Yet, the assumption that returns to skills are con-
stant over the lifetime of an individual may be too ∆ 2 ln ω ≡ ∆ ln ω c,t′ − t − ∆ ln ω c′′,t − t′′ = γt′ − γt′′. (34)
restrictive. Murphy and Welch (1992), for exam-
ple, show quite different age-earning profiles by Using data from the 1950–90 censuses, table A2
education. Nevertheless, a similar argument can gives some of the single and double differences of
be applied in this case too. For example, sup- cohort inequality for white men aged 26–55. The
pose ln ω cst = γst + A 1c − A 0c for cohort c of age s in single differences show increases in the returns to
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