Skilled labor reallocation, wage inequality, and unskilled unemployment

This paper analyzes the labor market effects of an increase in incentives i n raising total factor productivity and, thus, reallocating high-skilled la bor from production to non-production (i.e., R&D) activities. Within an end ogenous growth framework, it is shown that such a reallocation of skilled l abor depresses the demand for low-skilled labor. Contrary to the standard v iew of skill-biased technological change, the relative marginal productivit y of labor changes only because of relative employment effects. Moreover, t he impact of social comparisons between high-skilled and low-skilled worker s and within the group of low-skilled workers are examined.