Product lifecycles and skill-biased technical change

Abstract

The labour market position of low skilled workers has deteriorated dramatically over the 80s and early 90s. Awell-known manifestation of this deterioration is the rise in relative high-skilled wages observed in the UnitedStates. It is a well-documented fact that demand shifts underlie this deterioration and several studies indicate thattechnical change is a likely candidate to explain such relative demand shifts. It is, however, still not very wellunderstood why technological change would be biased persistently against low skilled workers when theirrelative labour costs are dropping. Modern economics considers technological change to be endogenous and theresult of rational decisions taken by economically constrained agents. This paper presents a model that providestwo possible answers to this puzzle. The bias can be caused by the deliberate development of skilled labourcomplementary technologies under certain conditions. If these conditions are met, the bias and the resultinglabour demand shift is a permanent one and so are the consequences for relative wages and employment levels.A slightly different specification with more realistic assumptions, however, can still explain the observed shift indemand. When I assume that the production of new products is inherently skill biased because uncertainty ishigh and flexibility required in the initial stages of the product life cycle, then the model can generate the shift inresponse to the introduction of a new general-purpose technology, for example the IT-revolution. Once newproducts mature and process innovations are made can low skilled workers be involved in the production of suchproducts. As such the model introduces some old ideas into a new debate.