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Does the Sector Bias of Skill-Biased Technical Change Explain Changing Wage Inequality?

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Jonathan E. Haskel
Matthew J. Slaughter

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Abstract

This paper examines whether the sector bias of skill-biased technical change (sbtc) explains changing skill premia within countries in recent decades. First, using a two-factor, two-sector, two-country model we demonstrate that in many cases it is the sector bias of sbtc that determines sbtc's effect on relative factor prices, not its factor bias. Thus, rising (falling) skill premia are caused by more extensive sbtc in skill-intensive (unskill-intensive) sectors. Second, we test the sector-bias hypothesis using industry data for many countries in recent decades. An initial consistency check strongly supports the hypothesis. Among ten countries we find a strong correlation between changes in skill premia and the sector bias of sbtc during the 1970s and 1980s. The hypothesis is also strongly supported by more structural estimation on U.S. and U.K. data of the economy-wide wage changes mandated' to maintain zero profits in all sectors in response to the sector bias of sbtc. The suggestive mandated-wage estimates match the direction of actual wage changes in both countries during both the 1970s and the 1980s. Thus, the empirical evidence strongly suggests that the sector bias of sbtc can help explain changing skill premia.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6565.

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Date of creation: May 1998
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Publication status: published as Haskel, Jonathan E. and Matthew J. Slaughter. "Does The Sector Bias Of Skill-biased Technical Change Explain Changing Skill Premia?," European Economic Review, 2002, v46(10,Dec), 1757-1783.
Handle: RePEc:nbr:nberwo:6565

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Find related papers by JEL classification:
F1 - International Economics - - Trade
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Berman, E. & Bound, J. & Machin, S., 1997. "Implications of Skill-Biased Technological Change: International Evidence," Papers 25, Centre for Economic Performance & Institute of Economics.
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  2. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December. [Downloadable!] (restricted)
  3. repec:fth:prinin:377 is not listed on IDEAS
  4. Topel, Robert H, 1997. "Factor Proportions and Relative Wages: The Supply-Side Determinants of Wage Inequality," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 55-74, Spring. [Downloadable!] (restricted)
  5. R. E. Baldwin & G. G. Cain, . "Shifts in U.S. Relative Wages: The Role of Trade, Technology, and Factor Endowments," Institute for Research on Poverty Discussion Papers 1132-97, University of Wisconsin Institute for Research on Poverty. [Downloadable!]
  6. Blau, Francine D & Kahn, Lawrence M, 1996. "International Differences in Male Wage Inequality: Institutions versus Market Forces," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 791-836, August. [Downloadable!] (restricted)
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  7. Robert E. Baldwin & Glen G. Cain, 1997. "Shifts in U.S. Relative Wages: The Role of Trade, Technology and Factor Endowments," NBER Working Papers 5934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Fortin, Nicole M & Lemieux, Thomas, 1997. "Institutional Changes and Rising Wage Inequality: Is There a Linkage?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 75-96, Spring. [Downloadable!] (restricted)
  9. Binswanger, Hans P, 1974. "The Measurement of Technical Change Biases with Many Factors of Production," American Economic Review, American Economic Association, vol. 64(6), pages 964-76, December. [Downloadable!] (restricted)
  10. Richardson, J David, 1995. "Income Inequality and Trade: How to Think, What to Conclude," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 33-55, Summer. [Downloadable!] (restricted)
  11. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May. [Downloadable!] (restricted)
  12. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1998. "Computing Inequality: Have Computers Changed The Labor Market?," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1169-1213, November. [Downloadable!] (restricted)
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  13. Paul Krugman, 1995. "Technology, Trade, and Factor Prices," NBER Working Papers 5355, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Freeman, Richard B, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer. [Downloadable!] (restricted)
  15. James Harrigan, 1997. "Estimation of Cross-Country Differences in Industry," NBER Working Papers 6121, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Johnson, George E, 1997. "Changes in Earnings Inequality: The Role of Demand Shifts," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 41-54, Spring. [Downloadable!] (restricted)
  17. Wood, Adrian, 1995. "How Trade Hurt Unskilled Workers," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 57-80, Summer. [Downloadable!] (restricted)
  18. Steven J. Davis, 1992. "Cross-Country Patterns of Change in Relative Wages," NBER Working Papers 4085, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Edward E. Leamer, 1996. "In Search of Stolper-Samuelson Effects on U.S. Wages," NBER Working Papers 5427, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. T. Huw Edwards & John Whalley, 2003. "Short and Long Run Decompositions of OECD Wage Inequality Changes," UWO Department of Economics Working Papers 20032, University of Western Ontario, Department of Economics, revised Sep 2002. [Downloadable!]
    Other versions:
  2. Lisandro Abrego & John Whalley, 2002. "Decomposing Wage Inequality Change Using General Equilibrium Models," NBER Working Papers 9184, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Haskel, Jonathan & Slaughter, Matthew, 1999. "Trade, Technology and UK Wage Inequality," CEPR Discussion Papers 2091, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Snower, Dennis J., 1999. "Causes of Changing Earnings Inequality," IZA Discussion Papers 29, Institute for the Study of Labor (IZA). [Downloadable!]
  5. Haskel, Jonathan, 2000. "The Trade and Labour Approaches to Wage Inequality," CEPR Discussion Papers 2476, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. David Rigby & Sebastien Breau, 2006. "Impacts of Trade on Wage Inequality in Los Angeles: Analysis Using Matched Employer-Employee Data," Working Papers 06-12, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  7. J. Paul Dunne & Lawrence Edwards, 2006. "Trade Technology and Employment: A case Study of South Africa," Discussion Papers 0602, University of the West of England, Department of Economics. [Downloadable!]
  8. Jeff Borland, 2000. "Economic Explanations of Earnings Distribution Trends in the International Literature and Application to New Zealand," Treasury Working Paper Series 00/16, New Zealand Treasury. [Downloadable!]
  9. Eli Berman, 2000. "Does Factor-Biased Technological Change Stifle International Covergence? Evidence from Manufacturing," NBER Working Papers 7964, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. James Harrigan & Rita Balaban, 1999. "U.S. Wages in General Equilibrium: The Effects of Prices, Technology, and Factor Supplies, 1963-1991," NBER Working Papers 6981, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Bruinshoofd,Allard & Hollanders,Hugo & Weel,Bas,ter, 1999. "Knowledge Spillovers and Wage Inequality: An Empirical Investigation of Knowledge-Skill Complementarity," Research Memoranda 008, Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology. [Downloadable!]
  12. Mariacristina Piva & Marco Vivarelli, 2004. "The determinants of the skill bias in Italy: R&D, organisation or globalisation?," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 13(4), pages 329-347, June. [Downloadable!] (restricted)
  13. Matthew J. Slaughter, 1998. "What Are the Results of Product-Price Studies and What Can We Learn From Their Differences?," NBER Working Papers 6591, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Steven Vincent Dunaway & Martin David Kaufman & Rodolfo Luzio, 2001. "Returns to Human Capital & Investment in New Technology," IMF Working Papers 01/133, International Monetary Fund. [Downloadable!]
  15. Dennis J. Snower, 1998. "Causes of changing earnings inequality," Proceedings, Federal Reserve Bank of Kansas City, pages 69-133. [Downloadable!]
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