Skill Biased Technological change

Definition: What is Skill Biased Technological Change?

This sort of change is intrinsically related to how technology impacts the workforce. Essentially, it suggests that technological advancements tend to benefit highly skilled workers more than less skilled workers, creating a widening wage gap. This is primarily because many of these advancements require specific skills to operate, manage and innovate, building a stronger demand for educated and skilled employees.

The Evolution and Drivers of Skill Biased Technological Change

Over the decades, technological advancements have been perceived as vital elements that foster economic productivity and development. However, they also serve as key drivers of Skill Biased Technological Change.

• During the 19th century and early 20th century, technologies favoured unskilled labour, reducing the wage gap.
• From the mid-20th century onwards, developments started becoming more skill-biased, benefiting skilled workers, thus broadening the wage gap.

These changes can be attributed to numerous factors, including globalisation, education policies, institutional changes, and socioeconomic conditions. Moreover, the drivers of SBTC also extend to the nature of technological change itself, such as the automation of routine tasks and the growth of digital and information-based activities.

Technological advancements and their contribution to Skill Biased Technological Change

In contemporary economics, SBTC is often linked with the rapid rise of computer-based technologies. These technologies typically require specialised knowledge to use effectively, thus creating a greater demand for educated, skilled workers. A significant manifestation of this can be seen in the way it affects wage discrepancy. As firms increasingly turn to technology-based production processes, there's a rising demand for high-skilled labour, leading to a surge in their wages relative to low-skilled labourers. In conclusion, understanding the complexities of Skill Biased Technological Change provides key insights into the dynamic relationship between technology and the labour market – an interaction that is becoming increasingly relevant in our modern, tech-forward world.

The Skill-Biased Technological Change Theory Explained

Moving forward, let's focus on the theory behind Skill-Biased Technological Change and how it shapes the current economic landscape. The crux of Skill-Biased Technological Change theory lies in the idea that technological advancements trigger an upward shift in the demand for skilled labour relative to unskilled labour. In this scenario, technology acts as a complement to skilled labour but as a substitute for unskilled labour.

Primary Proponents and Critiques of Skill-Biased Technological Change Theory

Among the significant proponents of the SBTC theory are two economists, Lawrence Katz and Kevin Murphy. In their seminal paper published in 1992, they highlighted how the growth in the college-high school wage gap in the United States since the late 1970s could be associated with SBTC. They argued that technological changes have been skill-biased and led to increased returns to schooling. Meanwhile, economists David Autor, Lawrence Katz, and Melissa Kearney offered another variant of the SBTC theory, known as the “Tinbergen Hypothesis.″ Here, it is proposed that wage inequality results from a race between education and technology. Critics of SBTC theory point out that while it might explain the wage gap, it doesn't fully account for changes in labour market inequality. They argue that institutional factors such as minimum wage laws, unionisation, and globalisation also significantly influence income inequality. Another critique is that the SBTC theory assumes that technology inherently favours skilled workers. Some critics contend that this may not always be true - technology can also replace certain forms of skilled labour. Further, rapid technological change sometimes creates a surplus of skilled workers, and the excess supply can consequently drive down their wage premium.

Applying Skill-Biased Technological Change Theory in Modern Economics

Understanding the SBTC theory is crucial to comprehend the evolution of wage inequality and labour market dynamics in modern economics. The influence of SBTC is visible in a variety of sectors, from manufacturing to the service industries. In manufacturing, the advent of automated machinery has led to a decrease in demand for unskilled labourers performing routine tasks. Conversely, a new demand has arisen for workers who can program and maintain this sophisticated machinery. This shift gives an impetus to SBTC, as those equipped with the necessary skills are favoured over their less-skilled counterparts, leading to a wage gap. Similarly, in the service sector, customer service jobs are increasingly being automated. Artificial intelligence, chatbots, and other digital tools are replacing human representatives. Those who succeed in this industry are now the ones who can develop and manage these technologies. Throughout this text, the term 'technology' is used to represent not only the physical devices used in production, such as machinery and software, but also the skills, knowledge, and ability to effectively implement and utilise these tools. For instance, computer literacy, mathematical aptitude, learning ability, problem-solving skills, and adaptability are all elements considered under the umbrella concept of 'technology'. It's important to note though, while the SBTC theory explains a large part of labour market dynamics, it's not the only factor at play. Factors like institutional changes, demographic shifts, globalisation, and the socio-political climate can also influence the demand and wage distribution among different skill levels.

Extensive and Intensive Skill Biased Technological Change: A Comparative Study

To further delve into the complex dynamics of Skill Biased Technological Change, it is crucial to examine its two distinct forms - Extensive and Intensive Skill Biased Technological Change. Remember that the 'extensive' and 'intensive' framework refers to the breadth and depth of how technology complements skilled labour and substitutes unskilled labour.

Characteristics and Impacts of Extensive Skill Biased Technological Change

Extensive Skill Biased Technological Change refers to shifts in technology affecting a wide range of sectors or industries in an economy. It is defined by its large coverage and is associated with significant structural changes in the overall labour market. Key characteristics of extensive SBTC:

• The impact of technological change spans across multiple sectors.
• It leads to a high demand for skilled labour at the expense of unskilled labour across various sectors.
• It induces large-scale shifts in occupation and sectoral employment shares.

This type of SBTC often leads to the reorganisation of labour markets at different skill levels. It promotes the adoption of technology-intensive methods of production, where skilled labour is typically preferred. One of the most significant impacts of extensive SBTC is the rising inequality in wage distribution and employment opportunities between skilled and unskilled workers. It leads to an 'upskilling' of the workforce, where the demand for high-skilled labour increases, pushing up their wages while reducing the relative demand for low-skilled labour.

Understanding the Dynamics of Intensive Skill Biased Technological Change

On the other hand, Intensive Skill Biased Technological Change pertains to more specific applications of technology that favour skilled labour in particular sectors or occupations. Unlike extensive SBTC, which covers a broad range, intensive SBTC applies to a narrow subset of occupations and industries. Key characteristics of intensive SBTC:

• Focused influence: The technological change primarily affects specific sectors or occupations.
• Higher skill premium: In the affected sectors, skilled workers tend to receive a higher wage premium due to the specificity of their skills.
• Selective displacement: A specific subset of unskilled workers is displaced, unlike in extensive SBTC, where unskilled labour in general faces a downturn.

The effects of intensive SBTC can be seen in sectors or fields where the application and management of specific technologies are crucial. Typically, these sectors demand a more specialized set of skills, leading to a higher wage premium for such skilled workers. Much like extensive SBTC, intensive SBTC also contributes to wage disparities. However, here, the wage inequality may get concentrated within specific occupations, reflecting the technological specificity and higher skill premium. Recognising the difference between extensive and intensive forms of SBTC helps shape a more nuanced understanding of how technology affects labour market dynamics, and also gives clues on how education and labour policies could be structured to mitigate the adverse effects of SBTC and make the most of its benefits.

Globalisation and Skill-Biased Technological Change: A Correlation

In the discourse surrounding economic disparities and dynamics, two terms often emerge hand-in-hand - globalisation and Skill-Biased Technological Change (SBTC). Both these elements, operating at different layers of an economy, hold a significant bearing on how labour markets function, evolve and alter in the face of an increasingly interconnected global landscape. Understanding the correlation between globalisation and SBTC becomes pertinent if we are to decipher the trends underpinning the labour markets and wage structures in our globalised world.

How Globalisation and Skill-Biased Technological Change have Contributed to International Economics

Globalisation, in essence, refers to the growing interconnectivity and interdependence of different countries. It involves the exchange and integration of ideas, cultures, and economic activities. Several factors drive globalisation with technology and digitisation playing a pivotal role. In the context of SBTC, which posits that technological advancements increase the demand for skilled labour relative to unskilled labour, globalisation acts as a facilitator. The widespread flow of technology and knowledge that globalisation enables, inevitably leads to a greater diffusion of skill-biased technologies across the globe. This dynamic creates an international labour market where high-skilled workers are in high-demand, hence offering prospects to workers with specific skills to participate in globally fragmented production processes. A significant manifestation of this can be seen in the offshoring of services, wherein specific tasks are delegated to countries where the necessary skills or infrastructure are available cheaply. However, this relationship also means that the unequal income distribution and disparity in employment opportunities, resulting from SBTC, extend beyond national borders. Countries where education systems cannot keep pace with the evolution of globalised industries may witness increasing levels of income inequality and unemployment.

The Role of Globalisation in Skill-Biased Technological Change

The relationship between SBTC and globalisation is not unidirectional. Simultaneously, globalisation also plays an emphatic role in shaping Skill-Biased Technological Change itself. The cross-border mobility of goods, services, and skills that globalisation endorses, often leads to the disproportionate distribution of technology and technological skills, influencing the very nature of SBTC. When discussing globalisation's role in SBTC, it's important to recognise the concept of 'Trade-induced technological change'. This theory suggests that increased trade and globalisation can encourage technological advancements that favor high-skilled workers. This is because firms, in their bid to remain competitive in the global market, would adopt new technologies that increase productivity but require high-skilled labour to operate effectively. Further, globalisation also pushes for 'International skill transfer', wherein technology and skills are not just confined to high-tech nations but dispersed and shared across borders. Globalisation, represents a double-edged sword. While on one side, it presents opportunities for lesser-developed nations to leapfrog their technology and skills gap by tapping into the global knowledge pool, on the other side, it may also exacerbate the digital divide if these nations cannot adapt quickly and effectively to skill-biased technological advancements. In summary, globalisation and Skill-Biased Technological Change are intrinsically linked, with each impacting the other in significant ways. By considering both in tandem, we gain a more comprehensive perspective on international economic dynamics, wage disparities, and the broader implications of this relationship on labour markets across the globe.

Implications of Skill Biased Technological Change: International Evidence

The repercussions of Skill Biased Technological Change (SBTC) can be seen across the globe. These effects manifest in the form of significant shifts in labour market dynamics, wage structures, and income inequalities. Let's look deeper into how SBTC has affected labour markets on a global scale and the diverse implications it has across different regions of the world.

Examining the Effects of Skill Biased Technological Change on Labour Markets

Labour markets, by nature, are sensitive to various external influences, and technology ranks among the most influential. Changes in technology not only boost operational efficiency but also alter the demand and supply dynamics of labour within markets. SBTC, in this context, becomes a critical prong shaping labour markets as they move towards a more digitised paradigm. When technology becomes more skill-biased, productivity increases for high-skilled, knowledge-intensive positions, leading to higher demand for such roles. Conversely, roles requiring lower skills face declines due to automation, leading to a lowering of demand for unskilled labour. Employment opportunities thus tend to expand more rapidly in high-skilled occupations, leading to an increased wage gap.

• Increased Productivity: As firms adopt skill-biased technologies, the productivity of skilled labour significantly enhances, which naturally boosts their wages. This occurs as high-skilled labour can leverage these technologies better, leading to improved outputs.
• Increased Wage Gap: With increased productivity and higher demand, wages for high-skilled personnel tend to rise. At the same time, as routine, lower-skilled jobs become automated, the demand and consequently, wages for unskilled labour tends to decrease.
• Occupational Polarisation: SBTC has led to a phenomenon known as 'job polarisation,' where employment grows in high-skilled and low-skilled jobs but shrinks for middle-skilled jobs. This is often on account of technological advancements automating routine tasks that were typically performed by workers occupying the mid-tier roles.

While this dynamic poses challenges, it also triggers crucial changes that can potentially reshape labour markets for the better. Increased occupational mobility, demand for continuous skill upgrades, and the need for more robust education and training systems are some implications fundamentally transforming the evolution of labour markets.

Case Studies: Impacts of Skill-Biased Technological Change across the Globe

The implications of SBTC vary across regions due to differences in technological adoption, educational systems, labour policies, and socioeconomic factors. Here are some international cases that illuminate the depth and breadth of influence exerted by SBTC: In contrast, Scandinavian countries like Sweden and Finland, with strong education policies and systems, have managed to control the rising inequality despite the rapid spread of digital technologies. There, people were able to adapt to the changing demand for skills, confirming that suitable education policies can help temper the adverse impacts of SBTC. Emerging economies, such as China and India, have seen an increase in wage inequality, triggered by an uneven technology adoption level and a growing digital divide. However, the high level of digital literacy among the younger population and the booming IT sector have created new avenues of high-skilled employment. Clearly, outcomes differ across countries depending upon the level of technological adoption, and the readiness of the labour force to adapt to the changing skills demand. SBTC has helped certain economies leapfrog their development process and mitigate the impacts of traditional constraints such as geography or resource scarcity, while others grapple with widening wage gaps and increasing unemployment rates among the less skilled. The key to navigating this shift lies in how well countries evolve their education, training and labour policies to equip their workforce with the skills needed in a digital, technologically advanced economy.