The Effects of Technical Change on Labor Market Inequalities

130 Pages Posted: 5 Dec 2012

See all articles by Andreas Hornstein

Andreas Hornstein

Federal Reserve Bank of Richmond

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Giovanni L. Violante

New York University, Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2004

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.

Keywords: inequality, institutions, labor markets, skills, technological change

JEL Classification: D3, J3, O3

Suggested Citation

Hornstein, Andreas and Krusell, Per L. and Violante, Giovanni L., The Effects of Technical Change on Labor Market Inequalities (December 20, 2004). FRB Richmond Working Paper No. 04-08. Available at SSRN: https://ssrn.com/abstract=2184932 or http://dx.doi.org/10.2139/ssrn.2184932

Andreas Hornstein (Contact Author)

Federal Reserve Bank of Richmond ( email )

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Per L. Krusell

Princeton University - Department of Economics ( email )

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HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

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Sweden
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HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

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Giovanni L. Violante

New York University, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-992-9771 (Phone)
212-995-4186 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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