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The Double Role of Skilled Labor, New Technologies and Wage Inequality

We examine the relationship between the supply of skilled labor, technological change and relative wages. In accounting for the role of skilled labor in both production activities and productivity- enhancing 'support' activities we derive the following results. First, an increase in the supply of skilled labor raises the employment share of non-production labor within firms, without lowering relative wages. Second, new technologies raise wage inequality only in so far as they give incentives to firms to reallocate skilled labor towards non-production activities. In contrast, skill-biased technological change of the sort usually considered in the literature does not affect wage inequality. Copyright Blackwell Publishing Ltd 2005.