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Nick Bloom, Stanford University, Labor Topics, 2011 1
LABOR TOPICS
Nick Bloom
Skill Biased Technical Change (SBTC)
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).
Nick Bloom, Stanford University, Labor Topics, 2011 3
Why this SBTC occurred
Skill Biased Technical Change (SBTC)
Changes in wage equality
Nick Bloom, Stanford University, Labor Topics, 2011 4
Wage inequality over time
Source: Autor, Katz and Kearney (2008, RESTAT)
Nick Bloom, Stanford University, Labor Topics, 2011 5
Wage inequality has been rising over timeIn 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)
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 (ei,t) from a Mincer wage equation: Log(wi,t) = α+βXi,t+ei,t
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 (ei,t) from a Mincer wage equation: Log(wi,t) = α+βXi,t+ei,t
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)
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.
Nick Bloom, Stanford University, Labor Topics, 2011 10
At the same time the quantity of ‘skills’ has increased
Source: Acemoglu (2002, JEL)
Nick Bloom, Stanford University, Labor Topics, 2011
The increase in skills happened both across and within industries
11
Autor, Katz and Krueger (1998, QJE)
Nick Bloom, Stanford University, Labor Topics, 2011
The skills increase also happened within plants
12Source: Dunne, Haltiwanger and Troske (1997, Carnegie Rochester Conference Series )
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
Nick Bloom, Stanford University, Labor Topics, 2011 14
Why this SBTC occurred
SBTC caused this change in inequality
Changes in wage equality
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 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 unmeasuredskills, raising within group inequality from 1970s onwards
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
Nick Bloom, Stanford University, Labor Topics, 2011 17
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 sametime as skilled wages has risen, at least since 1970s.
This has happened in every sector of the economy – so a universal rise inboth 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)
Nick Bloom, Stanford University, Labor Topics, 2011 18
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
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
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=AKαLβHγ
But the prior evidence suggests a strong skill biased component.
Nick Bloom, Stanford University, Labor Topics, 2011 21
Skill Biased Technical Change (SBTC)
Can extend the Solow model to for skilled and unskilled laborL=[(AsLs)σ + (AuLu)σ]1/σ <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)= β0 + β1(LC/LHS) + Dt + et
They found β1≈-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.
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
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
Nick Bloom, Stanford University, Labor Topics, 2011 24
Why this SBTC occurred
SBTC caused this change in inequality
Changes in wage equality
Nick Bloom, Stanford University, Labor Topics, 2011 25
Why did this SBTC occur?
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 capitalb) Skills directly complements computersc) 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
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=Kα(λ[μKs
ρ + (1-μ)Lsρ ]σ/ρ + (1- λ )Lu
σ)1/σ
If σ>ρ then reductions in the cost of K increase the demand for Ls
Effectively this replaces As/Au with the price of capital
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.
Nick Bloom, Stanford University, Labor Topics, 2011 29
(b) Computer capital complementarity (1/3)Worker-level evidenceKrueger (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?
Nick Bloom, Stanford University, Labor Topics, 2011 30
(b) Computer capital complementarity (2/3)
Industry level evidenceA 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 both• Increase in computerization in the 1980s also predicts skills
premium increases in the 1960s
In summary, appears likely computerization is strongly linked with SBTC, but hard to prove definitively
Nick Bloom, Stanford University, Labor Topics, 2011 31
(b) Computer capital complementarity (3/3)
Most recently Autor, Levy and Murnrane (2003) use the Dictionary of Occupational Titles to allocate cognitive and manual repetitive and non-repetitive tasks to jobs
• Idea is repetitive tasks can be replaced by computers, non-repetitive 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
Nick Bloom, Stanford University, Labor Topics, 2011 32
Source: Autor, Katz and Kearney (2007, RESTAT)
Evidence that employment is polarizing since the early 1990s – employment growth strongest below 30th percentile above the 75th
The polarization of employment (US data)
Nick Bloom, Stanford University, Labor Topics, 2011 33
Source: Acemoglu and Autor (2010, HLE)
The polarization of employment (International data)
Nick Bloom, Stanford University, Labor Topics, 2011 34Source: Acemoglu and Autor (2010, HLE)
The polarization by occupation (US data)
Nick Bloom, Stanford University, Labor Topics, 2011 35
(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
Nick Bloom, Stanford University, Labor Topics, 2011 36
What about other factors – trade unions?
Trade unions have been weakening since the 1970s while the absolute level of the minimum wage fell strongly in the 1980s
This almost certainly played a role in the particularly poor performance of the lower earnings quartiles in the 1980s.
But:• unions weakened only in the 1980s while the changes in inequality
started in the 1970s• unions only likely to effect lower quartiles, while higher quartiles is
where most of the action was
Nick Bloom, Stanford University, Labor Topics, 2011 37
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
Nick Bloom, Stanford University, Labor Topics, 2011 38
What about other factors – international trade(1/2) ?
Trade from China, India and other countries could also play a role?• Literature generally discounts this as a major force as skill levels and
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)
• The basic Hecksher-Olin model would not predict this within industry effects (predicts between industry effects going against within industry)
Nick Bloom, Stanford University, Labor Topics, 2011 39
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) finding major effects only post 2000 (particularly 2005)
Nick Bloom, Stanford University, Labor Topics, 2011 40
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 with limited empirical evidence beyond particular examples like drugs (Acemoglu and Linn, 2004 QJE) and air-conditioners (Newell, Jaffe and Stavins, 1999 QJE)