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Summary: „Changes in Earnings Inequality: The Role of Demand Shifts“

- George E. Johnson

This article examines the increase in earnings inequality which has occurred in

the last decades, starting in the 1970s or early 1980s. The paper argues that a

shift in demand for high-skilled has occurred and offers some possible

explanations.

High-skilled labor supply has increased in the last few decades, due to an

increase in workers that have some college education or a full college degree.

When high-skilled and low-skilled workers are imperfect substitutes, the

demand for skill level is downward sloping with respect to wage. With a now

occurring outward shift of high skilled labor supply, the relative wage of these

high-skilled workers should have decreased. This relative wage only decreased

in the 1970s though, and has continuously increased since the 1980s. The reason

seems to be a rightward shift in the demand for high-skilled labor.

The author names two possible causes for the demand shifts, increased openness

of the US economy and skill-biased technological change.

During the 1980s, the US economy had a large increase in its trade deficit. A

broad range of goods once produced domestically could now be imported for

less than the cost of producing them. These goods were formerly produced in

the US by low-skilled workers, whose jobs were now replaced by low-skilled

workers in countries with lower wages. Domestically produced goods were now

the kind of goods produced by high-skilled labor.

However, Johnson then gives reasons why the increased openness might not

play a role in the demand shift. He states that the share of displaced labor in the

tradable goods sector was too small to let a demand shift occur, and that the

occurred demand shift also took place in nontradeable industries.

Skill-biased technology change is the other major cause Johnson finds to play a

role in the demand shift. He distinguishes between three types of skill-bias

technical change.

Intensive-skill biased technological change occurs when high-skilled workers

become more productive in their current jobs, e.g. through the introduction of

personal computers. Extensive skill-biased technological change describes

high-skilled workers becoming more productive in jobs that were formerly

performed by unskilled workers, e.g. the use of robots in production processes.

Skill-neutral technological change occurs when the introduction of a new

technology leads to an increase in efficiency and production of all groups of

workers in the same proportion. Extensive-skill biases technological change

however is found to be the cause of a rightward shift in the relative demand for

skilled labor.

In reviewing the past literature on the topic and several case studies, Johnson

finds evidence supporting his findings. Furthermore he finds that the demand

for high-skilled labor has also risen in other OECD countries than the United

States. He finds the shift in demand to be highest in industries relying heavily on

the use of computers.

Johnson concluded his paper with the suggestion that a long-term commitment

to increasing the number of individuals going to college would work against the

phenomenon of increasing wage inequality.