The Multi-Dimensional Nature of Labor Demand and Skill-Biased Technical Change

Abstract

Investigating the robustness of the skill-biased technical change hypothesis, this analysis incorporates two novel features. First, effective labor is modeled as the product of a quantity measure - number of employees with a given level of education - and a quality index. The quality index, depending on, i.a., demographic characteristics and fields-of-study, makes it possible to control for other time-varying factors, beside technical changes. Second, low-skilled labor is more disaggregated than in earlier studies, making it possible to investigate aggregation bias with respect to the low-skilled. A full structural model is used, containing equations for four categories of labor, two types of capital and intermediate goods. Short run and long run effects are distinguished by allowing structure capital (plants) to be fixed in the short run. The empirical application is based on a panel of 24 industries in the Swedish manufacturing sector 1985-1995. As a by-product of the specification of effective labor, improved wage instruments are obtained, through the joint estimation of the instrumental variables and the parameters in the labor quality indexes. Compared to earlier analyses, the skill-bias is further corroborated in this study: controlling for changes in labor quality does not render the bias insignificant. Technical change hurts the demand for low-skilled labor and it hits harder the lower the level of education. Positive effects are found only for university educated workers. Substantial differences are, however, found among two groups of workers both of whose levels of education are below upper secondary school. Thus, when considering policy measures, low-skilled workers should not be treated as a homogenous group.