Structural change and the skill premium

• Published in: Structural change and economic dynamics 2022-09, Vol.62, p.247-261
• Main Authors: Guo, Kaiming, Hang, Jing, Yan, Se
• Format: Article
• Language: English
• Subjects: Skill premium; Structural change
• ISSN: 0954-349X; 1873-6017
• DOI: 10.1016/j.strueco.2022.05.011

•Structural change increases the skill premium if the sector absorbing more labor is skill-intensive and decreases the skill premium otherwise.•Capital deepening and sectoral productivity growth may change the skill premium by driving structural change.•Variations in the skill premium along the process of structural change depend on sectoral differences in factor-augmenting technologies, capital-labor substitutability and factor intensity.•Within-sector labor-augmenting technological change significantly influences the skill premium through the mechanism of structural change in the U.S. economy. Unlike existing studies that highlight the role of directed technological change in causing variations in the skill premium, we argue that capital deepening and sectoral productivity growth—even when neither skill-biased nor unskilled-biased—may change the skill premium by driving structural change. Using a standard model of structural change with sectoral differences in factor-augmenting technologies, capital-labor substitutability and factor intensity, we show that a larger fraction of skilled labor may be reallocated to the less capital-intensive sector or the less flexible sector as the capital-labor ratio increases. The process may increase the skill premium if the sector absorbing more labor is skill-intensive and deceases the skill premium otherwise. Capital-augmenting or labor-augmenting technological change within a sector may also cause such changes, even when it is not skill-biased or unskilled-biased. We apply the model to the U.S. economy over the period 1977-2005. While the effects of capital deepening and within-sector capital-augmenting technological change are limited, within-sector labor-augmenting technological change significantly influences the skill premium through the mechanism of structural change. We find that without labor-augmenting technological change in the goods-producing sector, the skill premium decreases by about one quarter because the share of the services sector that is more skill-intensive than the goods-producing sector falls by more than half.