Skill Biased Technological Change and Endogenous Benefits : The Dynamics of Unemployment and Wage Inequality


Weiss, Matthias ; Garloff, Alfred


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URL: http://ub-madoc.bib.uni-mannheim.de/1293
URN: urn:nbn:de:bsz:180-madoc-12934
Document Type: Working paper
Year of publication: 2005
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Veröffentlichungen des MEA (Mannheim Research Institute For the Economics of Aging) > MEA Discussion Papers
Subject: 330 Economics
Classification: JEL: E24 O30 J31 ,
Subject headings (SWD): Europa , USA , Arbeitslosigkeit , Technischer Fortschritt , Lohnstruktur
Abstract: In this paper, we study the effect of skill-biased technological change on unemployment and wage inequality in the presence and in the absence of a link between social benefits and average income. In the former case, an increase in the productivity of skilled workers and hence their wage leads to an increase in average income and hence in benefits. The increased fallback income, in turn, makes unskilled workers ask for higher wages. As higher wages are not justified by respective productivity increases, unemployment rises. More generally, we show that skill-biased technological change leads to increasing unemployment of the unskilled and to a moderately increasing wage inequality when benefits are endogenous. The model provides a theoretical explanation for diverging dynamics in wage inequality and unemployment under different social benefits regimes: Analyzing the social legislation in 14 countries, we find that benefits are linked to the evolution of average income in Continental Europe but not in the U.S. and the UK. Given this institutional difference, our model predicts that skill-biased technological change leads to rising unemployment in Continental Europe and rising wage inequality in the U.S. and the UK.
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Weiss, Matthias ; Garloff, Alfred (2005) Skill Biased Technological Change and Endogenous Benefits : The Dynamics of Unemployment and Wage Inequality. Open Access [Working paper]
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