The Rising Skill Premium, Technological Change and Appropriability

In the US the skill premium and the nonproduction/production wage differential increased strongly from the late 1970s onwards. Skillbiased technological change, trade with unskilledabundant countries and changes in the (domestic) supply of skilled workers have been proposed as explanatory factors. By the method of eliminating the impossible, skillbiased technological change is argued to be the dominant explanation. This paper shows that the dismissal of the increased supply of skill which is argued to be countervailing rising skill premiums is premature. In a simple model, well embedded in the literature on R&D, knowledge accumulation and (semi)endogenous growth, it is shown that the demand curve for skilled labour might well be upward sloping. Our key assumption is that skilled labour is employed in nonproduction activities that both generate and use knowledge inputs. It is shown that the tension between nonrivalness and appropriability of R&D output is crucial for the sign of the slope of the skilldemand curve. A necessary condition for an upward sloping demand curve is the ability of firms to appropriate the intertemporal returns from nonproduction activities.