Henry Siu

James Sullivan

ABSTRACT

Over the past two decades, the wages earned by skilled workers have consistently increased relative to the wages earned by unskilled workers. Moreover, this rising ‘skill premium’ has persisted despite a marked increase in the supply of skilled workers. Macro- and labor economists have attempted to explain this phenomenon in the context of US trends over the past 25 years. The most striking trend is the rapid pace of technological progress, particularly in the areas of computing and information technology. With regards to the phenomenon of wage dispersion, the most popular explanation cited in the literature is that of skill-biased technological change raising the productivity, and hence wages, of skilled workers relative to those of the unskilled. In this paper we test this hypothesis by looking at whether the theory holds out of sample. In particular, we identify the response of various skill premia to technological innovations at the Ford Motor Company between 1918 and 1947. We find this to be a suitable environment in which to test this hypothesis, given the characterization of labor skills, documented instances of technological innovation, and availability of wage and occupation data. In doing so, we bring evidence to bear upon the following question: do we observe skill-biased technological progress increasing the skill premium in historical wage data?

To empirically test our hypothesis, we conduct vector autoregression (VAR) analysis using wage data for skilled, low-skilled, and unskilled factory workers. We include in our VAR industry specific and macroeconomic data to capture the general equilibrium nature of wage determination. After identifying instances of skill-biased technological change at Ford, we analyze the impact of these innovations on our endogenously determined system, and in particular, the skill premium. We compute impulse response functions in order to determine the direction, magnitude, and duration of the impact the skill-biased ‘shocks’ had on the skill premium. Our results provide preliminary evidence that technological change within the Ford Company had a positive impact on the skill-premium for some of the identified technological innovations.