Understanding the Technology of Computer Technology Diffusion: Explaining Computer Adoption Patterns and Implications for the Wage Structure

We review the empirical literature about the implications of the computerization of the labor market to see whether it can explain observed computer adoption patterns and (long-term) changes in the wage structure. Evidence from empirical micro-economic studies turns out to be inconsistent with macro-economic studies that are based on Constant Elasticity of Substitution (CES) production functions. We propose a micro-economic foundation for the CES production function that allows for changes in the underlying structure. We adapt the macro-economic model by incorporating computer skills, complementary skills, and fixed costs for computer technology usage suggested by the micro-economics literature. It turns out that fixed costs for computer technology usage explain different patterns of computer adoption and diffusion between several types of workers and countries; they also provide very plausible patterns of the timing of wage inequality and technological developments over time.