Technology and the Labor Market

Abstract

Economic developments of the past three decades posed new questions to economists: what are the causes of fluctuations in rates of return to human capital? What is the relation between the changing skill–wage structure and changing overall wage inequality? Does the widening of the wage structure produce an equilibrating supply response? What are the causes, dimensions, and implications of the “technological cycle” for wages, unemployment, and its “natural rate”? Why is the long-term trend of human capital formation relentlessly upward?

My research of the past decade, among that of other economists, attempted to provide answers to these questions, as described above. In the course of the analysis several misconceptions are clarified: (1) The view of an increasing “wage gap” as a worsening “social divide” misses the incentive effects of the increased rates of return on furthering investments in human capital. These are empirically documented. (2) Growing overall wage inequality can conceal a declining inequality of opportunity as it did in recent decades. (3) Technological unemployment as an aggregate phenomenon appears to be a myth. (4) The concurrent supply response to increasing demand for human capital applies to investments, not to the stock. The cumulation of investments (such as enrollments) over time produces a lag in the response of the human capital stock. This lag is a basic cause of the “technological cycle.”

Finally, it is worth noting that a positive skill bias is not inherent in technological changes. These may sometimes carry a negative effect on the demand for human capital. The implications of “deskilling” (the assembly line is an example) would be the opposite of what we found for the recent decades (1970–2000). However the long-term growth of human capital suggests a positive skill-bias in the long run.