Technological change, labor markets, and ‘low-skill, low-technology traps’

Abstract

There is evidence that in several European countries in the last decade the demand for skilled workers did not keep pace with the relative supply thereby leading to the creation of a large pool of overeducated and underutilized workers. This paper analyses whether this mismatch can be attributed to a technology-related explanation. According to this hypothesis, pockets of overeducated and underutilized workers stem from firms' inability to reap the benefits associated with a high rate of technological progress because of strict employment protection regulation. Firing restrictions may prevent firms from immediately taking advantage of upward changes in skilled workforce availability and hence they may discourage firms from adopting new technologies. This, in turn, may diminish firms' growth prospects and thereby may reduce the number of vacancies that can be filled with highly skilled workers. The technology-related explanation is tested using data resulting from the 1995 wave of the European Community Household Panel (ECHP) survey. Empirical findings support the hypothesis of technology-related pockets of overeducated and underutilized workers.