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

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  • Matthias Weiss
  • Alfred Garloff
Abstract
In this article, we study the effect of skill-biased technological change on unemployment and wage inequality in the presence of a link between social benefits and average income. In this 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 corresponding productivity increases, unemployment rises. 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. Analysing 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 US 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 US and the UK.

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  • Matthias Weiss & Alfred Garloff, 2009. "Skill-biased technological change and endogenous benefits: the dynamics of unemployment and wage inequality," Applied Economics, Taylor & Francis Journals, vol. 43(7), pages 811-821.
    • Handle: RePEc:taf:applec:v:43:y:2009:i:7:p:811-821
    DOI: 10.1080/00036840802599933
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    5. Matthias Weiss & Alfred Garloff, 2009. "Skill-biased technological change and endogenous benefits: the dynamics of unemployment and wage inequality," Applied Economics, Taylor & Francis Journals, vol. 43(7), pages 811-821.
    6. Robert E. Baldwin & Glen G. Cain, 2000. "Shifts In Relative U.S. Wages: The Role Of Trade, Technology, And Factor Endowments," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 580-595, November.
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    Cited by:

    1. Jim Allen & Andries de Grip, 2012. "Does skill obsolescence increase the risk of employment loss?," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3237-3245, September.
    2. Melanie Lührmann & Matthias Weiss, 2006. "Market Work, Home Production, Consumer Demand and Unemployment among the Unskilled," MEA discussion paper series 06101, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    3. Horst Feldmann, 2013. "Technological unemployment in industrial countries," Journal of Evolutionary Economics, Springer, vol. 23(5), pages 1099-1126, November.
    4. Silvia Vannutelli & Sergio Scicchitano & Marco Biagetti, 2022. "Routine-biased technological change and wage inequality: do workers’ perceptions matter?," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 12(3), pages 409-450, September.
    5. Sandra Silva & Jorge Valente & Aurora Teixeira, 2012. "An evolutionary model of industry dynamics and firms’ institutional behavior with job search, bargaining and matching," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 7(1), pages 23-61, May.
    6. Joan Muysken & Ehsan Vallizadeh & Thomas Ziesemer, 2015. "Migration, Unemployment, and Skill Downgrading," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(2), pages 403-451, April.
    7. Vallizadeh, Ehsan & Joan, Muysken & Thomas, Ziesemer, 2012. "The impact of medium-skilled immigration: a general equilibrium approach," MPRA Paper 40006, University Library of Munich, Germany.
    8. Matthias Weiss & Alfred Garloff, 2009. "Skill-biased technological change and endogenous benefits: the dynamics of unemployment and wage inequality," Applied Economics, Taylor & Francis Journals, vol. 43(7), pages 811-821.
    9. Heblich, Stephan, 2007. "Eigenverantwortliche Individuen und Pro-Aktive Unternehmen," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-48-07, University of Passau, Faculty of Business and Economics.
    10. Vallizadeh, Ehsan & Muysken, Joan & Ziesemer, Thomas, 2013. "Migration, unemployment, and skill downgrading : a specific-factors approach," IAB-Discussion Paper 201313, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    11. Garloff, Alfred, 2008. "Minimum wages, wage dispersion and unemployment : a review on new search models," IAB-Discussion Paper 200833, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    12. Volkan Han & Oguz Ocal & Alper Aslan, 2023. "A revisit to the relationship between globalization and income inequality: are levels of development really paramount?," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(1), pages 973-990, February.
    13. Beblavý, Miroslav & Fabo, Brian & Lenaerts, Karolien, 2016. "Demand for Digital Skills in the US Labour Market: The IT Skills Pyramid," CEPS Papers 12055, Centre for European Policy Studies.
    14. Janssen, Simon & Mohrenweiser, Jens, 2015. "The long-lasting effect of technological change on the careers of young workers: Evidence from changes of mandatory training regulations," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112851, Verein für Socialpolitik / German Economic Association.
    15. Hutter, Christian & Weber, Enzo, 2021. "Labour market miracle, productivity debacle: Measuring the effects of skill-biased and skill-neutral technical change," Economic Modelling, Elsevier, vol. 102(C).

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    More about this item

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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