The rise in relative wage inequality in the United States, beginning in the late 1970s, seems to match the pattern on the rise in the college premium (or rise in the return to education). This rapid increase in the college premium is widely interpreted as evidence that labor market forces were driving up the price of skills.
Wage Differential Between College Graduates and High School Graduates, 1963-2001
Given the failure of supply side explanations, most economists came to believe that a majority of the change in inequality was due to factors that increased the relative demand for skilled (by which they meant educated) workers.
This makes intuitive sense, since supply of skilled workers has risen and their wages have risen demand must be rising also.
Relative Wage of Skilled Workers Relative Employment of Skilled Workers A S 1 S 0 D 0 D 1 B C p 0 p 1 r 0 r 1
Why? Well, the most likely demand shock would be due to technology, thus the theory of Skill Biased Technological Change (SBTC).
There are various SBTC formulations but at their heart they all contain two similar elements.
Technology increases the productivity of college grads more than high school grads (In our model the skilled θ increases in relative terms). Usually this is because educated labor and capital are complements, also frequently capital and low educated labor are viewed as substitutes.
Some “new” type of technology caused this skill bias to accelerate in the mid to late 1970’s. After looking at technological adoption during that time, the consensus suspect is Information Technology as embodied by computer microprocessors and their offspring technologies.
He regresses wage on controls and the binary “do you use a computer at work”
What might be wrong with this causal inference?
Dinardo & Pischke (1997) the binary “do you use a pencil at work”
A new generation – putting the skill back in SBTC
Many of these issues stem from the education=skill oversimplification. In fact wage inequality within education groups increased sharply in the late 1970’s-80’s, suggesting education may be a poor proxy for skill.
The response “occupation biased technological change”
Middle – ability to follow complicated rules, reliability
High – Abstract thought, communication
Computers role in this: Can’t do these “skills” neither a substitute nor complement Good at following rules and reliability, substitutes Bad at abstract thought, but good at managing data to aid – likely complements.