Wage inequality, technology and trade: 21st century evidence

an article by John Van Reenen (Centre for Economic Performance and London School of Economics) published in Labour Economics Volume 18 Issue 6 (December 2011)

Abstract

This paper describes and explains some of the principal trends in the wage and skill distribution in recent decades. Increases in wage inequality started in the US and UK at the end of the 1970s, but are now widespread. A good fraction of this inequality trend is due to technology-related increases in the demand for skilled workers outstripping the growth of their supply. Since the early 1990s, labour markets have become more polarised with jobs in the middle third of the wage distribution shrinking and those in the bottom and top third rising.

I argue that this is because computerisation complements the most skilled tasks, but substitutes for routine tasks performed by middle wage occupations such as clerks, leaving the demand for the lowest skilled service tasks largely unaffected.

Finally, I argue that technology is partly endogenous, for example it has been spurred by trade with China. Thus, trade does matter for changes in the labour market, but through a different mechanism than conventionally thought.

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