This paper develops a theoretical model to analyse how a General Purpose Technology (GPT) shapes within-group wage inequality when workers are ex-ante equal, but their adaptability to new technologies is subject to stochastic factors that are history dependent. It is argued that the diffusion of a GPT leverages the importance of these stochastic factors in three ways. First, a rise in the speed of embodied technological progress raises the market premium to workers adaptable to the leading-edge technology. Second, the generality of the technology raises the ability of adaptable workers to transfer recently acquired knowledge to new machines. Third, the generality of the technology reduces the cost of retooling old machines, which increases the demand for adaptable workers. In the model the rise in within-group inequality is mainly transitory, and is mirrored by a rise in wage instability. The key predictions of the model are shown to be in line with some of the existing empirical evidence.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2474.
Find related papers by JEL classification: E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data) J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General O30 - Economic Development, Technological Change, and Growth - - Technological Change - - - General
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Yoshiaki Azuma & Herschel I. Grossman, 2001.
"Educational Inequality,"
NBER Working Papers
8206, National Bureau of Economic Research, Inc.
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Other versions:
Yoshiaki Azuma & Herschel Grossman, 2001.
"Educational Inequality,"
Working Papers
2001-03, Brown University, Department of Economics.
[Downloadable!]
Yoshiaki Azuma & Herschel I. Grossman, 2003.
"Educational Inequality,"
LABOUR,
CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd, vol. 17(3), pages 317-335, 09.
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