Technological Changes
The early evidence on the importance of technological changes a source of the
shifts in the relative demand for different types of labor during the 1980s came
from case studies. The Bureau of labor Statistics conducted several case studies
of the effects of changes in production processes in particular industries
(Mark, 1987). In an industry that experienced a significant change in
technology, the usual pattern was a dramatic reduction in the employment of
production workers with an increase or no change in the number of skilled
workers in that industry. More recently there have been several econometric
analyses of the effects of variables like the (appropriately lagged) rate of
investment in computers and/ or other forms of "information capital" and the
ratio of expenditures on research and development to sales on changes in the
skill composition of industries (for examples, Berman, Bound and Griliches,

1994). The results of these studies are consistent with those of the case
studies and the hypotheses that the recent technological change has shifted the
relative demand for skilled labor to the right. Changes in production techniques
have widened across the country quickly, especially the multinational firms.

Thus, if technological change is an important determinant of relative demand
shifts, one would expect to observe patterns in other industrialized countries
similar to those in the United States. Some of the recent studies report results
for a variety of old industrialized (OECD) countries that are indeed consistent
with the U.S. results (Collechia and Papaconstantinou, 1996; Machin, Ryan and

Van Reenan, 1996). These countries vary a great deal with respect to changes in
their situations with respect to trade, labor market institutions (like the
importance of trade unions), and unemployment. Obviously, the relative demand
for skilled labor in each of them is rising rapidly. In my view, it is the
fairly strong evidence in favor of the wage inequality and technological change
story. A factor that is often cited as the specific issue of the post-1980 is
the widespread adoption of computer technology throughout the economy. As
mentioned above, the rate of skilled labor has tended to be greatest in those
industries with the highest rate of investment in computers. There is also
evidence that workers who use computers on the job have, other things constant,
higher earnings than those who do not (Krueger, 1993). In my view, it is
probably too early to determine that how much of the technological change dues
to computers affect wage inequality, but we will know more about the answer to
this question in 20 years. wwwwwwwwwwwwwwwwwww Over time, the difference between
the rate of economic growth and the rate of growth of the quantity of labor
input is usually attributed to technological change. It is also roughly equal to
the growth of the average real wage rate in the economy thus providing the link
that changes in technology or productivity are closely linked over time to
growth in real wages. Since the mid-1970s, however, the average real wage rate
in the United States has grown at a very low rate. Returning to the last two
columns in Table 2, column d shows the slowdown in the growth of real wages that
started around the 1970s. By subtracting column e from column d, it can be seen
that the average real wage rate has been essentially stagnant after adjustment
for the increase in average wages expected because of the upward shift in the
educational distribution. This fact is troubling for any explanation of the rise
in income inequality that focuses on skill-biased technological change. After
all, if there was so much technological change, why didn’t it cause high
average real wage increases, rather than the historically unprecedented
stagnation of wages? An answer to this question is that the effect of
technological change on the average real wage rate depends on which kind of
change occurs. Technological change that is neutral with respect to labor
skills—that increases the efficiency of both skilled and unskilled labor by
the same proportion—will result (after the adjustment of the aggregate capital
stock has occurred) in increases in the average real wage equal to the rate at
which efficiency increases. A bout of intensive skill-biased technological
change—resulting in skilled workers becoming more efficient in jobs that they
previously performed—means that as skilled workers become more productive,
their wages rise. This also leads to a rise in the wages of unskilled workers,
since they are complementary in production. But as long as elasticity of
substitution between different types of labor, o , is greater than one, then
employers will not be able fully to substitute unskilled for the higher-wage
skilled labor. Since the