The Effects of Technical Change on Labor Market Inequalities

In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labour market. A key focus is on the rise of US wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase in unemployment and an increased labour share of income, variables that remained stable in the US We hypothesize that these changes in labour market inequalities can be accounted for by the wave of capital-embodied technological change, which we also document. We propose a variety of mechanisms based on how technology increases the returns to education, ability, experience, and ‘luck’ in the labour market. We also discuss how the wage distribution may have been indirectly influenced by technical change through changes in certain aspects of the organization of work, such as the hierarchical structure of firms, the extent of unionization, and the degree of centralization of bargaining. To account for the US-Europe differences, we use a theory based on institutional differences between the United States and Europe, along with a common acceleration of technical change. Finally, we briefly comment on the implications of labour market inequalities for welfare and for economic policy.