Skill-Biased Technical Change1

Skill-Biased Technical Change is a shift in the production technology that favors skilled over unskilled labor by increasing its relative productivity and, therefore, its relative demand. Traditionally, technical change is viewed as factor-neutral. However, the observed rapid rise in the relative wage of skilled workers in conjunction with an upward trend in their relative supply means that recent technological change has been skill-biased. Theories and data suggest that new information technologies are complementary with skilled labor, at least in their adoption phase. The direction of technical change–i.e., whether new capital complements skilled or unskilled labor– may be determined endogenously by innovators’ economic incentives shaped by relative prices, the size of the market, and institutions. The “factor-bias” attribute puts technological change at the centerstage of the income distribution debate.