The Diffusion of Computers and the Distribution of Wages

This paper models the impact of the diffusion of computers on the wage structure, startingfrom the observation that computer use increases individual productivity, but also the supplyof goods. This latter effect negatively affects workers producing similar goods. If theproductivity gain is proportional, and the costs of a computer are equal for everyone, workerswith high wages are the first to adopt, leading to within-group wage inequality. Distinguishingskilled and unskilled workers we show that between-group wage inequality falls when the firstskilled workers adopt computers. When unskilled workers start to use computers, between-groupwage inequality increases strongly because of the increased supply of unskilled labor interms of efficiency units. The maximum level of wage inequality depends mainly onparameters regarding the distribution of the productivity of workers within and betweengroups: A large initial level of wage inequality leads to a large short term relative increase inwage inequality. In the long run, when all workers have adopted computers, both within-groupand between-group wage inequality fall to a level depending on differences in productivitygains from using computers. Empirically it is shown that the model is consistent with thepattern of wage inequality in the United States in the period 1963-2000. The current pattern ismainly determined by the short term determinants of wage inequality, making the long runimplications difficult to identify and predict.