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Wage Inequality and the Effort Incentive Effects of Technological Progress

  • Campbell Leith
  • Chol-Won Li

To explain the rise in the college wage premium in developed economies in the past decades, the present paper examines the effects of technological progress on workers‘ effort incentives, which determine the effective labor supply. Five effort incentive effects of technological progress are identified, and through these we obtain a number of results. Firstly, we establish that wage inequality can increase following an acceleration in skill-neutral technological progress. Secondly, an increase in skill-biased technological progress means, (i) skilled wages overshoot, (ii) unskilled wages undershoot, and hence (iii) wage inequality overshoots their respective long-run values. Thirdly, endogenising the number of skilled and unskilled workers on the basis of economic incentives does not eliminate wage inequality even in the long run. Fourthly, we can obtain hysteresis effects in the determination of long-run wage inequality. Finally, government policies which raise the equilibrium rate of unemployment are likely to reduce the impact of technical progress on inequality, and this may help to explain the relative increase in inequality in the US and UK compared with other European economies. Our focus on the supply-side complements studies which emphasize the impact of skill-biased technological progress on relative demand for skill workers.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 513.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_513
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  1. Kevin M. Murphy & W. Craig Riddell & Paul M. Romer, 1998. "Wages, Skills, and Technology in the United States and Canada," NBER Working Papers 6638, National Bureau of Economic Research, Inc.
  2. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  3. Davis, Steven J & Haltiwanger, John C, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 819-63, August.
  4. Miles S. Kimball, 1989. "Labor Market Dynamics When Unemployment Is A Worker Discipline Device," NBER Working Papers 2967, National Bureau of Economic Research, Inc.
  5. Andreas Hornstein & Per Krusell, 1996. "Can Technology Improvements Cause Productivity Slowdowns?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 209-276 National Bureau of Economic Research, Inc.
  6. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis.
  7. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1997. "Computing Inequality: Have Computers Changed the Labor Market?," NBER Working Papers 5956, National Bureau of Economic Research, Inc.
  8. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, June.
  9. Oded Galor & Omer Moav, 1998. "Ability Biased Technological Transition, Wage Inequality, and Economic Growth," Working Papers 98-14, Brown University, Department of Economics.
  10. Nickell, Stephen & Bell, Brian, 1995. "The Collapse in Demand for the Unskilled and Unemployment across the OECD," Oxford Review of Economic Policy, Oxford University Press, vol. 11(1), pages 40-62, Spring.
  11. Galor, Oded & Tsiddon, Daniel, 1996. "Technological Progress, Mobility, and Economic Growth," CEPR Discussion Papers 1413, C.E.P.R. Discussion Papers.
  12. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 217-272.
  13. Shapiro, Carl & Stiglitz, Joseph E, 1985. "Equilibrium Unemployment as a Worker Discipline Device: Reply," American Economic Review, American Economic Association, vol. 75(4), pages 892-93, September.
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