DEPARTMENT OF ECONOMICS WORKING PAPER SERIES Analyzing Skilled and Unskilled Labor Efficiencies in US

In this paper, using a production framework in which skilled and unskilled labor are imperfect substitutes, we analyze the time paths of the efficiencies of skilled and unskilled labor and their implications for wage inequality and economic growth. We find no evidence that supports the common view that there has been an acceleration in skilled biased technical change. Indeed, after 1973 the efficiency of skilled labor grew more slowly than it had from 1961 to 1973. More interestingly, we find that after 1973 there has been a substantial decline in the efficiency of unskilled labor, implying that the decline in unskilled labor efficiency has significantly contributed to the widening in the U.S. wage structure. In a standard growth accounting framework, these findings further imply that skilled labor efficiency growth accounts for 35 to 67 percent of output growth, while changes in unskilled labor efficiency account for -31 to 2 percent of output growth, depending on exact values of the parameters of the model and the definition of skilled labor. JEL Classification: E1, O3 and O4