Does the Sector Bias of Skill-Biased Technical Change Explain Changing Wage Inequality?

CEPR Discussion Paper Series No. 1940

Posted: 2 Mar 1999

See all articles by Matthew J. Slaughter

Matthew J. Slaughter

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Jonathan Haskel

Imperial College Business School; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1998

Abstract

This paper examines whether the sector bias of skill-biased technical change (SBTC) explains changing skill premia within countries in recent decades. First, using a two-factor, two-sector, two-country model we demonstrate that in many cases it is the sector bias of SBTC that determines SBTC's effect on relative factor prices, not its factor bias. Thus, rising (falling) skill premia are caused by more extensive SBTC in skill-intensive (unskill-intensive) sectors. Second, we test the sector-bias hypothesis using industry data for many countries in recent decades. An initial consistency check strongly supports the hypothesis. Among ten countries we find a strong correlation between changes in skill premia and the sector bias of SBTC during the 1970s and 1980s. The hypothesis is also strongly supported by more structural estimation on U.K. and U.S. data of the economy-wide wage changes "mandated" to maintain zero profits in all sectors in response to the sector bias of SBTC. The suggestive mandated-wage estimates match the direction of actual wage changes in both countries during both the 1970s and the 1980s. Thus, the empirical evidence strongly suggests that the sector bias of SBTC can help explain changing skill premia.

JEL Classification: F1, J3, O3

Suggested Citation

Slaughter, Matthew J. and Haskel, Jonathan, Does the Sector Bias of Skill-Biased Technical Change Explain Changing Wage Inequality? (July 1998). CEPR Discussion Paper Series No. 1940. Available at SSRN: https://ssrn.com/abstract=127928

Matthew J. Slaughter (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonathan Haskel

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
020 7594 8563 (Phone)
020 7594 5915 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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