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Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality

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  • Acemoglu, Daron

Abstract

This paper considers an economy where skilled and unskilled workers use different technologies. The rate of improvement of each technology is determined by a profit-maximizing R&D sector. When there is a high proportion of skilled workers in the labour-force, the market for skill-complementary technologies is larger and more effort will be spent in upgrading the productivity of skilled workers. An implication of this theory is that when the relative supply of skilled workers increases exogenously, the skill premium decreases in the short run, but then increases, possibly even above its initial value, because the larger market for skill-complementary technologies has changed the direction of technical change. This suggests that the rapid increase in the proportion of college graduates in the US labour-force may have been causal in both the decline in the college premium during the 1970s and the large increase in inequality during the 1980s. The paper also derives implications of directed technical change for residual wage inequality and shows that calculations of the impact of international trade on inequality that ignore the change in the direction of technical progress may be misleading.

Suggested Citation

  • Acemoglu, Daron, 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," CEPR Discussion Papers 1707, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1707
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    Keywords

    Endogenous Technical Change; Relative Supply of Skill; Returns to Education; Skill-Biased Technological Change; Skill-Technology Complementarity; Wage Inequality;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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