Skill Biased Technical Change and Rising Inequality: What is the Evidence? What are the Alternatives?

In this lecture, we address the evidence on the Skill Biased Technical Change hypothesis. There are at least Þve class of theories that I can discern, and I'll say something about each time permitting: 1. Capital skill complementarity 2. Correlations and timing: Computer technology and skill upgrading 3. Characteristics of technology and tasks: Changes in the organization of work 4. Nelson/Phelps 'disequilibrium' view 5. Changes in market structure 6. Endogenous acceleration view We will have something to say about each of them. In 1969, Zvi Griliches advanced the hypothesis that capital and skill are relative complements. By this he meant that although capital is likely to be complementary to both skilled and unskilled labor (for example, electric drills complement less skilled workers, adding machines complement more skilled), it tend to be more complementary to skilled labor. If this hypothesis is correct, capital deepening—that is the process of capital accumulation—will tend to increase the relative demand for skilled labor. Hence, economists have been quite receptive to the idea that the advent of a new technology (especially an information processing technology) would raise relative demand for skilled workers. The paper that takes this idea most seriously/literally is Krussell, Ohanian, Rios-Rull and Violante (2001 Econometrica). They build on an interesting fact observed by Gordon that the relative price of capital equipment has been falling steadily in the postwar period. Moreover, this rate of decline of equipment prices may have accelerated sometime during the mid to late 1970s. This observation, combined with the assumption of capital-skill complementarity, could potentially give rise to an increase in the relative demand for skilled labor. 25 KORV consider the following aggregate production function Y = K α s h b 1 L µ + (1 − b 1) ¡ b 2 K λ e + (1 − b 2) H λ ¢ µ/λ i (1−α)/µ where K s is structures capital (such as buildings), and K e is equipment capital (such as machines). The parameter σ 1 = 1/ (1 − λ) is the elasticity of substitution between equipment and skilled workers, and σ 2 = 1/ (1 − µ) is the elasticity of substitution between unskilled workers and the equipment-skilled worker aggregate. If σ 1 > σ 2 (i.e., µ > λ), equipment capital is more complementary (less substitutable) to skilled workers than unskilled workers, and as a result, an increase in K e will increase the …