Wage Inequality, Labor Market Polarization and Skill-Biased Technological Change: An Evolutionary (Agent-Based) Approach

Abstract

We replicate the core model of the well-tested Keynes + Schumpeter agent-based model family, which features an endogenous innovation process in the evolutionary tradition based on invention and imitation. We introduce heterogeneous labor in the form of three different types of workers, representing different skill levels. In addition to a number of other stylized facts, which are reproduced by any Keynes + Schumpeter model, our version also generates wage inequality and labor market polarization due to skill-biased technological change. We introduce various labor market institutions and policies to our artificial economy in order to test, whether and how they affect inequality and polarization. Those policies, which alter relative wages induce an evolution of the technological development towards a lower demand for the relatively expensive type of worker. Policies and institutions that only aim at increasing the relative wages of low- and medium skilled workers therefore prove to be unable to combat inequality in the long run on their own. In order to be effective, those policies must be combined with educative measures that allow the workers to adapt to the changes in labor demand. Our findings have important implications on the design of real-world policies against inequality and polarization, since they shed light on potential unintended consequences of some of these policies.