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The effects of technical change on labor market inequalities

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  • Andreas Hornstein
  • Per Krusell
  • Giovanni L. Violante

Abstract

In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labor market. A key focus is on the rise of U.S. wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase in unemployment and an increased labor share of income, variables that remained stable in the U.S. We hypothesize that these changes in labor market inequalities can be accounted for by the wave of capital-embodied technological change, which we also document. We propose a variety of mechanisms based on how technology increases the returns to education, ability, experience, and \"luck\" in the labor market. We also discuss how the wage distribution may have been indirectly influenced by technical change through changes in certain aspects of the organization of work, such as the hierarchical structure of firms, the extent of unionization, and the degree of centralization of bargaining. To account for the U.S.-Europe differences, we use a theory based on institutional differences between the United States and Europe, along with a common acceleration of technical change. Finally, we briefly comment on the implications of labor market inequalities for welfare and for economic policy.

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  • Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2004. "The effects of technical change on labor market inequalities," Working Paper 04-08, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:04-08
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    18. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2007. "Technology—Policy Interaction in Frictional Labour-Markets," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1089-1124.
    19. David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 733-783, October.
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    More about this item

    Keywords

    Labor market; Technology;

    JEL classification:

    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General

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