Skill-Biased Technological Change, Inequality, and the Role of Retraining

The collapse of routine occupations driven by skill-biased technological change hasshrunk economic opportunities for less-educated workers. Retraining could provide theworkers displaced by occupational decline with opportunities to gain skills that growingoccupations require. In this paper, I study the equilibrium effects of retraining in aneconomy with directed job search. Not only does retraining improve participants’ skills,it also changes non-participants’ optimal job search strategies and, in turn, their reemployment outcomes. I find that retraining reduces between-skill inequality whereas itincreases within-skill inequality. Eliminating retraining makes everyone worse off, causinglosses equivalent to a 1.5 percent drop in consumption. I also evaluate various labor marketpolicies that aim to encourage retraining participation. I show that combining retrainingwith a more generous unemployment insurance benefit is the most cost-effective policy. Italso results in the highest average welfare.