An overlapping generations approach to skill-biased technological change and human capital investment /

Abstract

This dissertation addresses the issue of the skill premium by developing a quantitative theory of the effects of skill-biased technological change (SBTC) on household investment in human capital over the life-cycle. A primary objective of this dissertation has been to develop a framework that incorporates SBTC, skill acquisition, and the skill premium in order to respond to a recent controversy within the literature. The approach is twofold---an empirical analysis of household higher education consumption patterns using Consumer Expenditure Survey data over the period 1980 to 1998 and a series of theoretical quantitative experiments of the impact of SBTC on skill acquisition and the skill premium employing an overlapping generations approach. Comparing the quantitative steady-state profiles to the empirical profiles tests the SBTC hypothesis. If the profiles are similar the SBTC hypothesis is supported.

Empirically, the life-cycle profiles have statistically changed between the 1980s and the 1990s, implying that the position in the life-cycle determines the significance of the income and substitution effects apparently arising from the increasing skill premium. Theoretically, a combination of the three individual intensive SBTC parameters replicates the results found in the empirical data although not perfectly. The comparative statics produce a widening skill premium that narrows for the old and may be explained by an associated substitution effect for the young accompanied by an income effect that dominates for older workers. The results show that given a dominant income effect for the older age cohorts the wage gap does not change much over time. Indeed, the model demonstrates that one can have SBTC and wage gaps for the old that do not change much over time. Thus, this research is able to provide an answer to one question posed by Card and DiNardo (2002) regarding the skill-biased technological change hypothesis. As such, one cannot reject the SBTC hypothesis as a result of wage gaps that do not change much for the older age cohorts.