Nick Bloom, Stanford University, Labor Topics, 2015

LABOR TOPICS
Nick Bloom
Skill Biased Technical Change (SBTC)
Nick Bloom, Stanford University, Labor Topics, 2015
Why care about skill-biased technical change?
It is a major topic in the literature over 100 papers in the

last two decades.
There are a number of outstanding questions on this that
careful micro-data work can address
Key political phenomena Governments around the world
have faced criticism that their economic policies have
increased earnings inequality
Even at the AEA
Changes in wage equality
Why this SBTC occurred
Wage inequality over time
Source:
Autor, Katz
and Kearney
(2008,
RESTAT)
Wage inequality has been rising over time

In the US wage (and consumption) inequality has risen since the 1960s
Source:
Autor, Katz
and Kearney
(2008,
RESTAT)
Note the fall in female wage discount despite rising labor participation
What about by education: college/high school
Source: Autor, Katz and

Kearney (2008, RESTAT)
Residual inequality is the variance of the error term (ei,t) from a Mincer
wage equation:
Log(wi,t) = +tXi,t+ei,t
This occurred throughout the period from 1960s

Kearney (2008, RESTAT)
Note: The CPS

data is available
both from the
NBER data
section, and
Census data from
the Michigan
IPUMS data site.
Residual inequality is the variance of the error term (ei,t) from a Mincer
wage equation:
Log(wi,t) = +tXi,t+ei,t
This increase in inequality was particularly a phenomena

of the top
half of the earnings distribution
Source: Autor,
Katz and
Kearney (2008,
RESTAT)

of the top
Source: Autor,
Katz and
Kearney (2008,
RESTAT)
10

of the top
Source:
Autor, Katz
and
Kearney
(2008,
RESTAT)
11
Inequality also rising across educational groups
Source: Autor, Katz

and Kearney (2007,
RESTAT)
In a standard Mincerian regression the returns to a year of

education rose from about 7.5% in 1980 to about 10% by 1995.
12
At the same time the quantity of skills has increased
Source: Acemoglu
(2002, JEL)
13
The increase in skills happened both across

and within industries
Autor, Katz and Krueger (1998, QJE)

14
The skills increase also happened within plants
Source: Dunne, Haltiwanger and Troske (1997, Carnegie Rochester Conference Series )
15
The international evidence

SBTC seems to have afflicted both global superpower nations
UK
US
Other much less important Anglo-Saxon countries

(Canada and Australia) also experienced a similar
phenomena
Across Europe there has been a more moderate wage
experience but typically more inequality in unemployment
Consistent with the idea that institutions constrained wages in
16
Europe
so movements in unemployment occur
instead
SBTC caused this change in inequality
17
What has caused this within and between group

changes in inequality? A summary response
(1) Technology changes in much of the 20th century have been skill biased
(2) This SBTC may have accelerated since the 1970s
(3) The supply of skilled workers accelerated in the 1970s but slowed from
the 1980s onwards
Thus, skills demand has outstripped supply, particularly since the 1980s,
raising between group (high/low education) inequality
The same phenomena has also probably also occurred for unmeasured
skills, raising within group inequality from 1970s onwards
18
Why has technology been skilled biased (1/2)?

There is no need for technological changes to be skill biased
The industrial revolution in England increased the use of factories
employing low skilled workers at the expense of craftsmen
Luddite rebellions of 1811 and 1812 were in response to falling
wages of skilled weavers as factories replaced traditional weaving
Ned Ludd probably a fictional
character but the movement was a
major issue for the British, and even
during the Napoleonic wars required
extensive troops to surpress
19
Why has technology been skilled biased (2/2)?

The support for 20th Century SBTC is empirical there has been a
massive increase in the supply of skills (educated workers) at the same
time as skilled wages has risen, at least since 1970s.
This has happened in every sector of the economy so a universal rise in
both the quantity and price of skills. This must be a demand shift
Evidence that SBTC driven earlier in the century due to electrification
(Goldin & Katz, 1998 & 2007)
20
Over the 20th century skills premia has fluctuated

Source:
Goldin &
Katz
(2007)
Variation in
returns
mainly
due to
change in
relative
supply of
skilled
and
unskilled
workers
21
In fact computerization has a long history
22
And is now so central because it is 40% of

capital investment
23
There have actually been 2 technological revolutions:

The Green Revolution and the Industrial Revolution
24
Back to the increase in the returns to skills how

should we model this?
The traditional Solow model is skill neutral in technical change:
Y=AKLH
But the prior evidence suggests a strong skill biased component.
25

Can extend the Solow model to skilled and unskilled labor
L=[(AsLs) + (AuLu)]1/ <1
SBTC in this setup would be the ratio As/Au rising over time
Can substitute into a production function & re-arrange in terms of
wage premium. Katz and Murphy (1992, QJE) did this and estimated
the following regression implied by this production function:
Ln(Ws/Wu)= 0 + 1(LC/LHS) + Dt + et
They found 1-2/3 and Dt about 2.5% (2% on figures to 2005)

Suggests that labor supply clearly matters, but there has been a
steady trend favoring skilled labor over the last 40 years.
26
Trends in college/high-school labor supply

Skill rose strongly in 1970s because:
Vietnam draft laws
Higher education expansion
interacting with post-war baby boom
Can see 1970s rise in skills supply and
falls in relative skilled wages against
long-run trend
Source: Acemoglu and Autor, (2010)
27
Katz & Murphy (1992) results (updated by AA 2010)

Once you detrend skills supply and
relative wages the relationship is
clear.
Need to interpret cautiously, though,
as only about 40 observations with
serially correlated errors
So predicted college/high school

wage gap from a trend plus
college/high-school skills supply looks
a good fit
But - need to interpret cautiously, as
only about 40 observations with
serially correlated errors
28 & Kearney (2008, RESTAT)

Source: Autor, Katz
SBTC caused this change in inequality
29
Why did this SBTC occur?
30
Why did this SBTC occur - summary?

(1) Proximate cause appears to be cheaper capital and/or computers
(2) But why is this skill-biased? Several arguments:
a) Skills directly complement physical capital
b) Skills directly complements computer capital
c) Skills needed for rapid change post 1970s had rapid change
(3) Other factors that appear to play an additional (more minor) role:
) Labor market institutions (minimum wage and Unions)
) Trade with developing countries, e.g. China
(4) But why did capital (particularly PCs) become cheaper? One view is
the direction of technology is endogenous the rise in skills promoted
SBTC to occur
31
(a) Physical Capital complementarity (1/2)

One plausible idea is that capital is more complementary to skilled labor
then unskilled labor.
Krussell, Ohanian, Rios-Rull and Violante (2000, Econometrica)
Y=K([Ks + (1-)Ls ]/ + (1- )Lu)1/
If > then reductions in the cost of K increase the demand for L s
Effectively this replaces As/Au with the price of capital
32
(a) Physical Capital complementarity (2/2)

Krussell et al. (2000) then provide evidence for a long-run fall in the cost
of capital providing results for the model matching the data
So neat model and plausible results.
But there is an identification problem as the impact of the cost of capital is
killed by a time trend (Acemoglu (2002, JEL), so can not be certain.
33
Computing has become cheaper
34
(b) Computer capital complementarity (1/3)

Worker-level evidence
Krueger (1993) shows that people using computers earn higher wages, and
this wage premium has increased over time.
Consistent with computers playing an important role, but also with
computers proxying unobserved skills for example DiNardo and Pischke
(1997) show similar phenomena is true for pencils.
Computers or pencils?
35
The impact of a nice and clear title
36

Industry level evidence
A number of papers also show that:
All industries show an increase in skill demand and skill premium
This rise is faster in industries increasing computerization faster
The drawback to this evidence is that:
Unobserved could have been something else driving both
Increase in computerization in the 1980s also predicts skills
premium increases in the 1960s
R&D also correlated 0.8 with computer use Machin & Van
Reenen (1998)
In summary, appears likely computerization is strongly linked with SBTC,
but hard to prove definitively
37

Most recently Autor, Levy and Murnrane (2003) use the Dictionary of
Occupational Titles to allocate cognitive and manual repetitive and nonrepetitive tasks to jobs
Idea is repetitive tasks can be replaced by computers, nonrepetitive ones can not
Find that wages and employment in repetitive tasks fallen fastest
leading to a polarization of employment: lovely and lousy jobs as
christened by Goos and Manning (2008) for the UK
38
The polarization of employment (US data)
Evidence that
employment is
polarizing since
the early 1990s
employment
growth strongest
below 30th
percentile above
the 75th

Kearney
39 (2007, RESTAT)
The polarization of employment (International data)
Source: Acemoglu and Autor (2010, HLE)

40
The polarization by occupation (US data)
Source: Acemoglu and Autor (2010, HLE)

41
Polarization of US incomes too (1/2)
Source: Guvenen, Ozkan and Song (2013)

42
Polarization of US
incomes too (2/2)
Source: Autor and Dorn,

(2013, AER)
43
(c) Skills are needed to deal with change

The Nelson and Phelps (1966) hypothesis is that change is complex and
skilled people are better at dealing with this
The acceleration hypothesis
Consistent with evidence that higher skilled employees are
increasingly in demand as firms rapidly changing technologies
Problems are that periods of 1970 to 1995 are associated with sluggish
TFP growth hard to reconcile this with radical technological change
So in summary seems plausible but hard to fully pin down
44
What about other factors trade unions?

This almost certainly played a role in the particularly poor performance of
the lower earnings quartiles in the 1980s
But problems with being full story:
unions weakened only in the 1980s while the changes in inequality
started in the 1970s
unions only likely to effect lower/middle quartiles, while higher quartiles
is where most of the action was
45
What about other factors minimum wage?

Real value of the minimum wage fell throughout the 1980s as this was not
indexed and frequently not updated. This almost certainly played a role in
particularly poor performance on the lowest quartile in the 1980s.
But problems with MW as a complete story:
MW only started to decline in real-value in 1980s
Other countries like the UK had no MW until late 1990s
46
What about other factors international trade(1/2) ?

Trade from China and other countries could also play a role? Three issues:
Magnitudes not big enough to account for size of change (the US is not
open enough, at least until recently) Krugman(2008, Brookings)
High-skilled wages have risen in almost every industry (including all the
non-tradable sectors)
Also trade generally has limited predictive power: e.g. Berman, Bound
and Griliches (1994, QJE), Autor, Katz and Krueger (1997, QJE) and
Machin and Van Reenen (1998 QJE)
47
What about other factors international trade(2/2) ?

But:
Could possibly be due to outsourcing within non-tradable industries
More generally the empirical evidence is primarily in late 1990s before
Chinese imports really took off. Since then entire industries have
virtually disappeared (furniture, toys, textiles etc..)
So trade is probably an increasingly big factor: Bloom, Draca and Van
Reenen (2011) and Autor, Dorn and Hansen (2013) both finding major
effects only post 2000 (particularly 2005).
Also true that manufacturing in particular seen a very sharp drop in
employment since 2000 due to China and WTO, and that has high share
non-skilled middle-income employees (Pierce and Shott, 2013)
48
China joining WTO coincided huge drop in US

manufacturing employment
Source: Charles, Hurst and Notowidigdo (2013)

49
Masked by the construction boom until 2008 crash
Source: Charles, Hurst and Notowidigdo (2013)

50
What about other factors measurement

Maybe educational content in a college degree is rising
US college now harder to get into (greater selection)
Education more effective per year (productivity and
inputs are both rising in education).
Would suggest that college degree probably increasingly
less substitutable with a non-college degree (larger gap
in the human-capital between them)
Evidence (see next slide) suggests this
51
Elasticity of Substitution college vs non-college

(by industry)
Source: On the Time-Varying Substitutability of Labor Inputs and the Rise of Wage Inequality in
the U.S. 1976-2010 by Jay Hong & Raul Santaeulalia-Lopez (2011 WUSTL mimeo)
52
Endogeneous technical change

Final question is why did SBTC occur in the 1970s?
Acemoglu (1998, QJE and 2002 RESTUD) and others have a number of
papers around the idea of endogenous technical change idea that
increased supply of graduates led to technical change
Related idea is endogenous technical adoption different countries adopt
different technologies endogenously
An interesting area of research and plausible hypothesis but little empirical
evidence beyond particular examples like:
- drugs (Acemoglu and Linn, 2004 QJE)
- air-conditioners (Newell, Jaffe and Stavins, 1999 QJE)
- clean-tech spurred on by recent rise in oil prices
53
Next lecture on top-end pay
54
BACK-UP
55
Also an interesting sharp-post war contraction in

inequality the Great Compression
Goldin and Margo (1992)
argue arises because of:
Supply: Increased
university enrollment
(GI Bill),
Demand: Increase in
non-skilled labor
demand from
manufacturing
Institutional: Unions
strong post-war (low
unemployment) and
National War Labor
Board
56

Nick Bloom, Stanford University, Labor Topics, 2015

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