The Skill Premium, Technological Change And Appropriability

Abstract

In the U.S., the skill premium and the non-production/production wage differential increased strongly from the late 1970s onwards. Skill-biased technological change is now generally seen as the dominant explanation, which calls for theories to explain the bias. This paper shows that the increased supply of skill - which is usually seen as countervailing the rise in skill premiums - can actually cause rising skill premiums. The analysis starts from an R&D-driven endogenous growth model. Our key assumption is that skilled labour is employed in non-production activities that both generate and use knowledge inputs. If firms can sufficiently appropriate the intertemporal returns from these activities, skill premiums may rise with the supply of skilled labour. The degree of appropriability is endogenous and rises with the supply of skills. As a result, the skill premium first falls and then increases when skilled labour supply rises. Simultaneously, patents per dollar spent on R&D fall.