The Diffusion of Computers and the Distribution of Wages

Abstract This paper offers a theoretical model of the adoption and diffusion of computers at work to analyze between-group and within-group wage inequality, inspired by the empirical observation that the composition of the group of workers using a computer changes over time and that the timing of the rise in between-group and within-group wage inequality is different. The model conjectures that initially only the most productive workers adopt computers, because they can save more on their wage costs. This leads to within-group wage inequality because computer adopters become more efficient. With falling costs of computerization, only when the number of skilled computer users becomes large or when the unskilled workers start to adopt computers, between-group wage inequality increases because the additional supply of efficiency units of unskilled workers depresses the unskilled wages. The occurrence of wage inequality is caused by the additional supply of efficiency units of labor and productivity gains from using computers and not by assuming that skilled workers gain more in terms of productivity from using a computer than unskilled workers. When all workers have adopted computers, between-group and within-group wage inequality disappear unless there are differences in productivity gains between workers. Based on CPS data, it is shown that the predicted pattern of adoption and diffusion is consistent with the observed pattern and the timing of the rise in between-group and within-group wage inequality in the United States in the period 1963-2000.