Saturday, May 31, 2008

Debunking Skill-biased Technical Change

David Card, who always does excellent work, and John DiNardo published a nice work on the subject. Here is their conclusion:

133-40: "Since the late 1980s, a consensus has emerged that the decline in real wages for low-skilled workers in the early 1980s and the subsequent slow recovery of these wage levels are explained by skill-biased technological change. In this chapter, we have argued that the evidence underlying this consensus is remarkably frail. Much of the evidence takes the form of "proof by residual." After accounting for changes in relative supply and (in some cases) making a modest list of other factors, proponents of this consensus note that the decline in the relative wages of low-skilled labor remains unexplained. Skill-biased technological change is then left as the only plausible explanation for the facts. Given the state of knowledge about how labor markets work, we find this line of argument unconvincing. Moreover, the evidence that emerges from such an exercise is highly model-specific. Depending on how the data for different groups are organized, the degree of substitution that is allowed between workers of different genders or ages, and the list of other job characteristics that are included in the decomposition, the results can suggest that rising inequality was either an ubiquitous phenomenon affecting virtually all workers over the past three decades or a trend that mainly affected young workers in the early 1980s."


Card, David and John DiNardo. 2006. "The Impact of Technological Change on Low-Wage Workers: A Review." In Rebecca M. Blank, Sheldon H. Danziger, and Robert F. Schoeni, editors. Working and Poor: How Economic and Policy Changes Are Affecting Low-Wage Workers (New York: Russell Sage Foundation): pp. 113-140.

6 comments:

John Emerson said...

Neoliberals DeLong and, I think, Krugman have both floated the word "power" as a possible explanation. It was not clear to me what they meant, and they didn't explain. Is this an economic category, or are they suggesting a noneconomic political explanation?

If they mean political power, since 1968 there have been 7 anti-labor administrations and 2 very weakly pro-labor administrations. (Though perhaps Nixon was less anti-labor than I think). The media have been mostly anti-labor too. It would seem that for 40 year now labor has almost never gotten the benefit of the doubt.

By "labor", of course, I mean both "unions" and "working people".

Michael Perelman said...

That is exactly what I was trying to discuss in The Confiscation of American Prosperity.

John Emerson said...

When DeLong and Krugman used the word "power", did that represent a substantive change in their thinking compared to 1994 or so?

If so, it might indicate that their getting actively involved in politics made them better economists. At DeLong and elsewhere I often used to see economists talking about how the two of them were demeaning themselves by doing politics instead of scientific work, but I suspect the opposite.

Both of them are somewhat reticent about mea culpas, of course, though not completely so.

YouNotSneaky! said...

John,

One thing to keep in mind is that the "power" and the "skill-biased technological change" explanations are not necessarily mutually exclusive. After all, the fact that a particular machine gets invented which can replace a number of workers at a lower cost (actually not even that) basically means that those workers' "power" has declined.

Now, if you're talking about post tax/transfer incomes then obviously the two are different. But I don't think anyone has argued that technological change can affect the kind of tax system that the political process implements.

Myrtle Blackwood said...

""Since the late 1980s, a consensus has emerged that the decline in real wages for low-skilled workers in the early 1980s and the subsequent slow recovery of these wage levels are explained by skill-biased technological change...

The rather alarming changes that were occuring in the 1980s (in the US and in other nations such as Australia) suggests the opposite.

In the 1980s huge amounts of speculative paper spread through the banking, credit and financial system. Capital ceased to be used for productive purposes in the US. And public infrastructure declined well below break even level. Employment declined dramatically in the industrial sector and was replaced in the service sector much of it low paid and low skill in nature or in the parasitic financial sector. At the same time there was a marked growth in the US balance of payments deficit. There was wild speculation and a stock market boom. A stock market crash in 1987 occurred but then the index recovered and kept rising until the Dow had passed 3,000. A much broader speculative boom then spread to commercial and residential real estate. This boom began to implode at the end of the decade and savings and commercial banks by the score became insolvent. Unprecedented federal deficits pushed the public debt of the United States into the ionosphere, with the total almost quadrupling over a little more than ten years to approach a total of $3.25 thousand billion. . In 1989, it was estimated that total debt claims in the US economy had attained almost $25 thousand billion, and their total has increased exponentially ever since. The debt of state and local governments, corporate debt, consumer debt --all expanded into the wild blue yonder. In the meantime, the Great Lakes industrial region became the rust bowl, the Sun belt oil and computer booms collapsed, the great cities of the east were rotten to the core with slums, and farmers went bankrupt more rapidly than at any other time in the memory of man. Living standards had been in a gradual but constant decline since the days of Nixon, middle class families began to discover that they could no longer afford their own home or hope to send their children to college due to prohibitive costs. The Bureau of the Census failed in 1990 to count the number of those who had become homeless during the 1980's, since the real figure may have been around 5-6 million. For the vast majority of the US population (to say nothing of the brutal immiseration in the developing countries) it was an epoch of austerity, sacrifice, and decline, of the entropy of a society in which most people have no purpose and feel themselves becoming redundant, both on the job market and ontologically.

This is a summary compile from:

The Leveraged Buyout Gang
George Bush: The Unauthorized Biography
by Webster G. Tarpley & Anton Chaitkin
Chapter -XIX- The Leveraged Buy-out Gang
http://killtown.911review.org/bushbio/chapter19.html

Anonymous said...

if i recall Krugman wrote in the '90's that international trade was not causing inequality (and stolper-samuelson effects were innaplicable, presumably assuming 'full employment' which seems reasonable globally, because of the lump of labor fallacy). he pointed to skills, such as the ability to get into Yale or MIT like my heros Bush and Chalabi.

later, in NYT's mag, he resorted to the more current ('80's) style explanation of 'social norms' for determining who has a 'skill' to get into yale or get high as opposed to low wages. some have termed these 'conventions'.

J. Galbraith, the hereditary owner of a tenured faculty position in Texas, actually has many papers suggesting this interpretation too, it appears. Its a scam.

As for the idea that 'noone has suggested technological change may have effected tax policy and hence inequality', i wonder what planet 'you not sneaky' lives on. Europe, primord(or)ial soup for many amerikkkans? Ever heard of a 'lobbyist'?