Technological Changes

Technological Changes The early evidence on the importance of technological changes a source of the shifts in the relative demand for different types of labor during the 1980s came from case studies.

The Bureau of labor Statistics conducted several case studies of the effects of changes in production processes in particular industries (Mark, 1987). In an industry that experienced a significant change in technology, the usual pattern was a dramatic reduction in the employment of production workers with an increase or no change in the number of skilled workers in that industry. More recently there have been several econometric analyses of the effects of variables like the (appropriately lagged) rate of investment in computers and/ or other forms of “information capital” and the ratio of expenditures on research and development to sales on changes in the skill composition of industries (for examples, Berman, Bound and Griliches, 1994).

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The results of these studies are consistent with those of the case studies and the hypotheses that the recent technological change has shifted the relative demand for skilled labor to the right.Changes in production techniques have widened across the country quickly, especially the multinational firms. Thus, if technological change is an important determinant of relative demand shifts, one would expect to observe patterns in other industrialized countries similar to those in the United States. Some of the recent studies report results for a variety of old industrialized (OECD) countries that are indeed consistent with the U.S. results (Collechia and Papaconstantinou, 1996; Machin, Ryan and Van Reenan, 1996). These countries vary a great deal with respect to changes in their situations with respect to trade, labor market institutions (like the importance of trade unions), and unemployment.

Obviously, the relative demand for skilled labor in each of them is rising rapidly.In my view, it is the fairly strong evidence in favor of the wage inequality and technological change story. A factor that is often cited as the specific issue of the post-1980 is the widespread adoption of computer technology throughout the economy. As mentioned above, the rate of skilled labor has tended to be greatest in those industries with the highest rate of investment in computers. There is also evidence that workers who use computers on the job have, other things constant, higher earnings than those who do not (Krueger, 1993). In my view, it is probably too early to determine that how much of the technological change dues to computers affect wage inequality, but we will know more about the answer to this question in 20 years. wwwwwwwwwwwwwwwwwww Over time, the difference between the rate of economic growth and the rate of growth of the quantity of labor input is usually attributed to technological change.

It is also roughly equal to the growth of the average real wage rate in the economy thus providing the link that changes in technology or productivity are closely linked over time to growth in real wages. Since the mid-1970s, however, the average real wage rate in the United States has grown at a very low rate. Returning to the last two columns in Table 2, column d shows the slowdown in the growth of real wages that started around the 1970s. By subtracting column e from column d, it can be seen that the average real wage rate has been essentially stagnant after adjustment for the increase in average wages expected because of the upward shift in the educational distribution. This fact is troubling for any explanation of the rise in income inequality that focuses on skill-biased technological change.After all, if there was so much technological change, why didnt it cause high average real wage increases, rather than the historically unprecedented stagnation of wages? An answer to this question is that the effect of technological change on the average real wage rate depends on which kind of change occurs. Technological change that is neutral with respect to labor skillsthat increases the efficiency of both skilled and unskilled labor by the same proportionwill result (after the adjustment of the aggregate capital stock has occurred) in increases in the average real wage equal to the rate at which efficiency increases. A bout of intensive skill-biased technological changeresulting in skilled workers becoming more efficient in jobs that they previously performedmeans that as skilled workers become more productive, their wages rise.

This also leads to a rise in the wages of unskilled workers, since they are complementary in production. But as long as elasticity of substitution between different types of labor, o , is greater than one, then employers will not be able fully to substitute unskilled for the higher-wage skilled labor. Since the wages of both types of workers rise, the average real wage rate rises; however, because of imperfect substitutability, the skilled-unskilled relative wage rate will also rise slightly.However, extensive skill-biased technological changechanges in production processes such that skilled workers are profitably employed in some jobs that unskilled workers used to dois a different situation. In this case, the wage of skilled workers rises, but the wage of unskilled workers fall. The average wage in the economy rises due to extensive skill-biased technological change, but it does not rise very much, for the increased efficiency associated with skilled workers performing their new jobs more efficiently than unskilled workers used to is at least partially offset by the decrease in employment in the initially skilled jobs and by the lower productivity of unskilled workers in the jobs that remain for them. A particular innovation, like assembly lines, railroads, or telecommunications, may represent different forms of technological change at different stages of its development.

The introduction of personal computers, for example, may have increased the efficiency of skilled workers in their initial jobs, but it is clear from the various empirical studies that it caused an increase in the fraction of jobs normally performed by skilled workers.A lot of research and development expenditure over the past 20 years probably went into figuring out ways that various repetitive functions could be computerized. This should have increased the relative demand for skilled labor, but it would not necessarily have increased output per person-hour very much. Will Inequality Continue to Rise? The sharp rise in earning inequality and the virtual stagnation of the average real wage in the United States since the early 1970s are matters of intense public concern.

The weight of evidence suggests that the principle cause is an increase in the rate of extensive skill-biased technological change. But will this trend continue? It is possible that as computer technology becomes better able to perform more sophisticated tasks, the effects of technology will change direction so that unskilled workers can become more efficient in jobs that were formerly done by todays skilled workers.For example, insurance agents are reportedly concerned about the implications for their future earnings of the new ability of customers to purchase their policies through the Internet. This would represent the reverse of extensive skill-biased technological change; high school graduates could perform most of the necessary labor functions with computerized purchases. If practices of this sort become fairly widespread in the future, the relative demand for skilled labor will not shift to the right as rapidly as rapidly as it has in the recent past and might theoretically even shift back to the left. But while one can offer possible examples in particular industries of the technological bias turning in favor of unskilled workers, it would be unwise to stake too much on a movement of this sort reversing the trend toward greater inequality.

After all, the demand function for high-skilled labor has been shifting to the right fairly consistently for a long time.Based on the post-World War II experience in the United States, it is highly unlikely that it will not continue to do so. The only realistic question is whether the pace of change will be as great as it has been during the past 25 years. It is difficult to think of policies that would halt this technological shiftfor example, imposing a large tax on computers?and even if such policies could be put in place, they should not be.

Thus, public policies to “do something” about earnings inequality have focused on other proposals, like a large increase in the minimum wage, government training programs, import restrictions, tax rate reductions for rich old people, and so forth. While this paper is not the place for a review of these choices, it is fair to say that most of the available options either present potentially undesirable side effects or may work only very slowly or not at all, or all of the above. Will the supply side of the economy adjust to reduce the amount of inequality? There has been a fairly steady rightward shift in the educational distribution in the United States over the past half-century.The trends shown in Table 1 imply that the relative supply of college/high school equivalent labor has grown at an average annual rate of 2.9 percent. Further, one might suppose that the huge increase in the private rate of return to investment in a college education associated with the rise in the college/high school relative would cause a large increase in the relative supply of college graduates, which could eventually reduce the wage premium of high-skilled labor. This is the story implicit in Figure 1, in which the vertical short-run relative supply function shifts over time the same amount as the relative demand function so that, in the long run, Returns to R.

If this story were correct, the rise in inequality would be a relatively temporary eventthat is, lasting perhaps another decade or twowhich might not require policy intervention. There is some supply adjustment in the pipeline, judging from the time series data on the educational attainment of young adults and of the proportion of college-age persons enrolled in school.For example, the proportion of 20-to 21-year-old males enrolled in school rose from 31.6 percent in 1979 to 42.6 percent in 1993, while the value of R increased by 17.7 percent. The implied relative supply elasticity is 1.7, which is in line with previous estimates of this parameter (Freeman, 1986).

This value, however, is not nearly large enough to yield the 3 to 5 percent rates of growth of relative supplydepending on whether the next 15 years is like the 1950-1980 or the post-1980 periodnecessary to keep up with the likely technologically induced shifts in future demand for high-skilled labor. In addition, much of the past high rates of increase in the relative supply of educated labor were due to the replacement of old people with a low average level of schooling by young persons with a high average level. Beginning around 2010, the average level of education of labor force exiters will be quite high, reflection in part the large boost in the number of students who attended college in the 1960s, probably in part because it was a way to defer military service. For the relative supply of educated labor to grow rapidly after 2010, rates of college attendance will have to be extremely large to avoid a new bout of wage inequality.It would seem, therefore, that a long-term commitment to increasing greatly the fraction of individuals who go to college is the appropriate public policy response to the phenomenon of increasing inequality. But this is more easily written than done effectively.