Technological change, relative wages, and unemployment

This paper examines the effect of skilled-biased technological shocks on the structure of wages and the composition of employment in a two-sector economy with a heterogeneous work force. Efficiency wage considerations, turnover costs and minimum wage legislation lead to labor market segmentation and equilibrium unemployment. The analysis focuses on the effects of a technological shock that raises the demand for skilled labor and reduces the demand for unskilled labor, in such a way that the total demand for labor in the primary (high wage) sector remains constant at initial wages. The presence of efficiency considerations implies that such a shock tends to reduce total employment in that sector, as the equilibrium increase in skilled labor employment is smaller than the drop in the employment of unskilled labor. Efficiency factors and initial unemployment are shown to magnify the adverse employment effects of pro-skilled technological progress.