Technological Transitions with Skill Heterogeneity Across Generations

Abstract

We study how inequality, skills, and economic activity adjust over time to technological innovations. We develop a theory of technological transitions where economies adjust through two margins: (i) within-generation reallocation of workers with heterogeneous skills, and (ii) cross-generation changes in the skill distribution driven by entering generations investing in skills. We then characterize the equilibrium dynamics, showing that they resemble those of a q-theory of skill investment where q is lifetime inequality. Technological transitions are slower and more unequal whenever innovations are biased towards economic activities intensive in skills which differ more from those used in the rest of the economy—i.e., technology-skill specificity is higher. This is because the first margin is weaker and the second stronger. Lastly, we document that recent cognitive-biased innovations caused responses in occupational composition and training which were strong for younger generations but weak for older ones. This evidence is consistent with high technology-skill specificity, implying that cognitive-biased transitions are particularly slow and unequal because they are mainly driven by changes in the skill distribution across generations.