WHY DO NEW TECHNOLOGIES COMPLEMENT SKILLS - DIRECTED TECHNICAL CHANGEAND WAGE INEQUALITY

A high proportion of skilled workers in the labor force implies a larg e market size for skill-complementary technologies, and encourages fas ter upgrading of the productivity of skilled workers. As a result, an increase in the supply of skills reduces the skill premium in the shor t run, but then it induces skill-biased technical change and increases the skill premium, possibly even above its initial value. This theory suggests that the rapid increase in the proportion of college graduat es in the United States labor force in the 1970s may have been a causa l factor in both the decline in the college premium during the 1970s a nd the large increase in inequality during the 1980s.