Skill-Biased Technological Change

Definition

Skill-biased technological change refers to the phenomenon where technological advancements disproportionately benefit skilled workers over unskilled workers, leading to an increase in the demand for skilled labor and a widening of the wage gap between skilled and unskilled workers. This concept is particularly relevant in understanding changes in labor markets and the causes of income inequality.

5 Must Know Facts For Your Next Test

1. Skill-biased technological change is a key driver of the widening income inequality observed in many developed economies in recent decades.
2. Technological advancements, such as automation, computerization, and the use of information technology, tend to complement the skills and tasks performed by educated, highly skilled workers, leading to an increase in their productivity and wages.
3. In contrast, these technological changes often substitute for the routine, manual tasks performed by unskilled or low-skilled workers, reducing the demand for their labor and leading to a decline in their relative wages.
4. The increased demand for skilled labor due to skill-biased technological change has contributed to a rise in the wage premium, which is the additional compensation that skilled workers earn compared to unskilled workers.
5. The shift in labor demand towards skilled workers has also led to an increase in the importance of human capital, as individuals with higher levels of education, training, and specialized skills become more valuable in the labor market.

Review Questions

• Explain how skill-biased technological change affects the demand for skilled and unskilled labor in the labor market.
  • Skill-biased technological change leads to an increase in the relative demand for skilled labor compared to unskilled labor. Technological advancements, such as automation and computerization, tend to complement the tasks and skills of educated, highly skilled workers, making them more productive and valuable in the labor market. In contrast, these technological changes often substitute for the routine, manual tasks performed by unskilled or low-skilled workers, reducing the demand for their labor. This shift in labor demand towards skilled workers results in a widening of the wage gap between skilled and unskilled workers, as skilled workers command a higher wage premium.
• Analyze the relationship between skill-biased technological change and the importance of human capital in the labor market.
  • Skill-biased technological change has increased the importance of human capital, which refers to the knowledge, skills, and abilities that individuals acquire through education, training, and experience. As technological advancements complement the tasks and skills of educated, highly skilled workers, these individuals become more valuable in the labor market. Consequently, the increased demand for skilled labor has led to a rise in the wage premium, providing greater incentives for individuals to invest in their human capital through higher education and specialized training. This, in turn, further reinforces the skill-biased nature of technological change, as a more educated and skilled workforce becomes better equipped to adapt to and benefit from technological innovations.
• Evaluate the role of skill-biased technological change in contributing to the observed increase in income inequality in developed economies.
  • Skill-biased technological change is widely recognized as a significant contributor to the widening income inequality observed in many developed economies in recent decades. By disproportionately benefiting skilled workers over unskilled workers, technological advancements have led to an increase in the demand for skilled labor and a rise in the wage premium. This has resulted in a growing gap between the earnings of skilled and unskilled workers, as skilled workers command higher wages due to their increased productivity and value in the labor market. The shift in labor demand towards skilled workers has also increased the importance of human capital, further exacerbating income inequality as individuals with higher levels of education and specialized skills reap the benefits of skill-biased technological change. Addressing the implications of skill-biased technological change has become a crucial policy challenge in addressing the issue of income inequality.

Related terms

Wage Premium: The additional compensation that skilled workers earn compared to unskilled workers, which increases as a result of skill-biased technological change.

Skill-Biased Demand Shift: The increase in the relative demand for skilled workers driven by technological advancements that complement skilled labor and substitute for unskilled labor.

Human Capital:

The knowledge, skills, and abilities that individuals acquire through education, training, and experience, which become more valuable in the face of skill-biased technological change.