Skill Biased Technical Change Polarization of the Labor Market and Wage Inequality

Shifts in the aggregate production function have long been studied by economists. Solow (1957) first classified these shifts as technical changes that can encompass slowdowns, speedups or improvements in the education of the labor force. Solow showed that these technical changes were factor-neutral from 1909-1949. Shifts in the production function are neutral if they leave the marginal rate of transformation unchanged and simply increase or decrease the output attainable from a set of given inputs. These factor-neutral technical changes have since been widely studied and have led to the consensus that factor-neutral technology improvements are the primary source of growth in income per capita. More recent empirical work has used a similar idea to capture and estimate the growth of relative wages of more educated workers. A simple CES model is typically used as a theoretical starting point for estimating movements of relative wages induced by skill biased technical changes that are assumed to be factor augmenting. This model has been widely used to explain tends in the labor market over the past four decades. However more recent changes, commencing in the early 1990’s are no longer consistent with such a simple model. Three noteworthy trends, which are the focus of this paper, are the increasing wage inequality between and within education groups, wage polarization and job polarization. Since these appear to be secular trends that began around the early