Skill-Biased Technological Change: Is there Hope for the Unskilled?

Content This paper challenges the common view that skill-biased technological change boosts wage inequality. In a multi-sector economy, relative wages depend not only on relative productivities but also on relative goods prices. If there are complementarities between goods that do not benefit greatly from technological innovations and other goods whose production costs fall in the course of technical progress, the relative price of these "low-tech" goods rises. If the production of these "low-tech" goods is intensive in the use of unskilled labor, unskilled workers benefit from this increase in the relative goods price. This paper presents a simple two-sector, two-factor model of perpetual exogenous skill-biased technological change. The model is able to explain the increase in wage inequality in the 1980s and the subsequent stabilization of the wage structure in the 1990s.