DP2765 Technological Acceleration, Skill Transferability and the Rise in Residual Inequality

Author(s): Giovanni L. Violante
Publication Date: May 2001
Keyword(s): Earnings Instability, Skill Transferability, Technological Acceleration, Wage Inequality, Wage Loss Upon Displacement
JEL(s): E24, J31, O30
Programme Areas: Labour Economics, Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2765

This Paper provides an interpretation for the recent rise in residual wage inequality which is consistent with the empirical observation that a sizeable part of this increase has a transitory nature, a feature that eludes standard models based on ex-ante heterogeneity in ability. In the model an acceleration in the rate of quality-improvement of equipment, like the one observed from the early 70's, reduces workers’ capacity to transfer skills from old to new machines. This force generates a rise in the cross-sectional variance of skills, and therefore of wages. Through calibration, the Paper shows that this mechanism can account for 30% of the surge in residual inequality in the US economy (or for most of its transitory component). Two key implications of the theory - faster within job wage growth and larger wage losses upon displacement - find empirical support in the data.