Sectoral Value Added Prices, TFP Growth, and the Low-Skilled Wage in High-Income Countries

Abstract

This econometric analysis investigates the impact of changes in sectoral value-added prices and total factor productivity (TFP) on the equilibrium relative wage of low-skilled workers in eleven high-income countries. The key finding is that TFP growth mandated an increase in the unskilled wage, relative to the remuneration of human capital, during the 1970s, but a decrease during the 1980s. This is consistent with the observation that, in most sample countries, the relative wage and employment opportunities of low-skilled workers tended to improve until about 1980, but have deteriorated since then. While the regression results suggest that technological change played a large role in shifting labour demand against low-skilled workers, this conclusion is qualified because the empirical evidence is also compatible with product upgrading and outsourcing of low-skill intensive production activities to low-income countries.