Nick Bloom, Stanford University, Labor Topics, 2011 1 LABOR TOPICS Nick Bloom Skill Biased Technical...

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Nick Bloom, Stanford University, Labor Topics, 2011 1 LABOR TOPICS Nick Bloom Skill Biased Technical Change (SBTC) Slide 2 Nick Bloom, Stanford University, Labor Topics, 2011 2 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 while their economic policies have increased the distribution of earnings (or employment). Slide 3 Nick Bloom, Stanford University, Labor Topics, 2011 3 Why this SBTC occurred Skill Biased Technical Change (SBTC) Changes in wage equality Slide 4 Nick Bloom, Stanford University, Labor Topics, 2011 4 Wage inequality over time Source: Autor, Katz and Kearney (2008, RESTAT) Slide 5 Nick Bloom, Stanford University, Labor Topics, 2011 5 Wage inequality has been rising over time In the US wage (and consumption) inequality has risen since the 1960s Note the fall in female wage discount despite rising labor participation Source: Autor, Katz and Kearney (2008, RESTAT) Slide 6 Nick Bloom, Stanford University, Labor Topics, 2011 6 What about by educational group: college/high school Source: Autor, Katz and Kearney (2008, RESTAT) Residual inequality is the variance of the error term (e i,t ) from a Mincer wage equation:Log(w i,t ) = +X i,t +e i,t Slide 7 Nick Bloom, Stanford University, Labor Topics, 2011 7 This occurred throughout the period from 1960s Source: Autor, Katz and 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 (e i,t ) from a Mincer wage equation:Log(w i,t ) = +X i,t +e i,t Slide 8 Nick Bloom, Stanford University, Labor Topics, 2011 8 This increase in inequality was particularly a phenomena of top half of the earnings distribution Source: Autor, Katz and Kearney (2008, RESTAT) Slide 9 Nick Bloom, Stanford University, Labor Topics, 2011 9 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. Slide 10 Nick Bloom, Stanford University, Labor Topics, 2011 10 At the same time the quantity of skills has increased Source: Acemoglu (2002, JEL) Slide 11 Nick Bloom, Stanford University, Labor Topics, 2011 The increase in skills happened both across and within industries 11 Autor, Katz and Krueger (1998, QJE) Slide 12 Nick Bloom, Stanford University, Labor Topics, 2011 The skills increase also happened within plants 12 Source: Dunne, Haltiwanger and Troske (1997, Carnegie Rochester Conference Series ) Slide 13 Nick Bloom, Stanford University, Labor Topics, 2011 13 The international evidence SBTC seems to have afflicted both global superpower nations The UK experienced similar wage & employment trends as the US Canada and Australia also experienced a similar phenomena Across Europe there has been a more moderate wage experience but typically more inequality in unemployment This seems to be consistent with the idea that institutions constrained wages changes in Europe so movements in unemployment occur instead Slide 14 Nick Bloom, Stanford University, Labor Topics, 2011 14 Why this SBTC occurred SBTC caused this change in inequality Changes in wage equality Slide 15 Nick Bloom, Stanford University, Labor Topics, 2011 15 What has caused this within and between group changes in inequality? A summary response (1)Technology changes in much of the 20 th 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 Slide 16 Nick Bloom, Stanford University, Labor Topics, 2011 16 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 Slide 17 Nick Bloom, Stanford University, Labor Topics, 2011 17 Why has technology been skilled biased (2/2)? The support for 20 th 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) Slide 18 Nick Bloom, Stanford University, Labor Topics, 2011 18 Over the 20 th century skills premia has fluctuated Source: Goldin & Katz (2007) Variation in returns mainly due to change in relative supply of skilled and unskilled workers Slide 19 Nick Bloom, Stanford University, Labor Topics, 2011 19 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 Slide 20 Nick Bloom, Stanford University, Labor Topics, 2011 20 Modeling the increase in returns to skills The traditional Solow model is skill neutral in technical change: Y=AK L H But the prior evidence suggests a strong skill biased component. Slide 21 Nick Bloom, Stanford University, Labor Topics, 2011 21 Skill Biased Technical Change (SBTC) Can extend the Solow model to for skilled and unskilled labor L=[(A s L s ) + (A u L u ) ] 1/Slide 22 Nick Bloom, Stanford University, Labor Topics, 2011 22 Trends in college/high-school labor supply Source: Acemoglu and Autor, (2010) 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 Slide 23 Nick Bloom, Stanford University, Labor Topics, 2011 23 Katz & Murphy (1992) results (updated by AA 2010) Source: Autor, Katz & Kearney (2008, RESTAT) 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 Slide 24 Nick Bloom, Stanford University, Labor Topics, 2011 24 Why this SBTC occurred SBTC caused this change in inequality Changes in wage equality Slide 25 Nick Bloom, Stanford University, Labor Topics, 2011 25 Why did this SBTC occur? Slide 26 Nick Bloom, Stanford University, Labor Topics, 2011 26 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 capital b)Skills directly complements computers 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 Slide 27 Nick Bloom, Stanford University, Labor Topics, 2011 27 (a) 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 ([K s + (1-)L s ] / + (1- )L u ) 1/ If > then reductions in the cost of K increase the demand for L s Effectively this replaces A s /A u with the price of capital Slide 28 Nick Bloom, Stanford University, Labor Topics, 2011 28 (a) 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. Slide 29 Nick Bloom, Stanford University, Labor Topics, 2011 29 (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. R&D also correlated 0.8 with computer use Machin & Van Reenen (1998) Computers or pencils? Slide 30 Nick Bloom, Stanford University, Labor Topics, 2011 30 (b) Computer capital complementarity (2/3) Industry level evidence A number of papers also show that: All industries show an increase in skills 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 bo