Skill-biased technological change and endogenous benefits: the dynamics of unemployment and wage inequality

Abstract

Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0579.pdf Nontechnical summaryThis paper studies the employment and wage dynamics under skill-biased technical change and different social welfare concepts. In a general equilibrium model, we show that different state schemes of poverty reduction lead to different developments in unemployment rates for the low-skilled across systems and to a different dynamics of wage dispersion. Using the social legislation of European and Anglo-Saxon countries and data from the OECD, we demonstrate these connections empirically.We claim that one system to circumvent poverty, the European system, is such that poverty is perceived as a relative concept. Therefore, the payments of the central system to avoid poverty, social benefits, must be linked to per-capita income. Because the wage of the low-skilled workers in general depends on their outside option, the low-skilled workers wage is linked to social benefits and therefore to the average income. Thus, skill-biased technical change increases the wage of the low-skilled because it increases the productivity of the high-skilled and affects via the average wage their outside option. Unemployment of the low-skilled increases because their wage increase is not justified by a respective productivity increase. On the other hand, when, as in the U.S., the poverty line does not depend on the average income, and therefore, social benefits do not depend on average income, there is no link between skill-biased technical progress and unemployment. In this system, too, the unskilled workers wage depends on the outside option. But, the outside option of the low-skilled does not depend on average income and therefore not on the wage of the high-skilled workers. Wage dispersion in the form of rising real wages for the high-skilled increases, while unemployment is unchanged in the course of technological development.Our model demonstrates that the basic intuition underlying the above argumentation is correct: in a system where benefits depend on average income, unemployment increases when the productivity of the high-skilled increases. The dispersion increases, too, but less strong if compared to a market where benefits do not depend on average income. Thereby, we show, that the model is able to reproduce the stylized facts for the developments in the European and the Anglo-Saxon model over the last 20 years.Empirically, we demonstrate, that the basic claims of the paper are correct. We show that in almost all Euro...

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