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... (Acemoglu, 2002a). But the case with r < 1 is not of great empirical relevance in the context of skilled and unskilled workers, since almost all existing estimates suggest that r > 1 (Freeman, 1986; =-=Hamermesh, 1993-=-). Let us start with a relatively weak form of the common technology assumption. In particular, suppose that A j hðtÞ gjhhjðtÞAhðtÞ and Ajl ðtÞ gjlhjðtÞAlðtÞ: ð5Þ This assumption can be interprete...

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...wer, Oswald, and Sanfey, 1997) support the view that there is some amount of rent-sharing. That technology adoption is endogenous is close to the heart of many economists, and in previous work (e.g., =-=Acemoglu, 1998-=-, and especially,1999a, 2000), I developed this theme in detail and showed how it can help us understand the behavior of the demand for skills and wage inequality in the U.S. Finally, the view that mi...

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...down precisely, there is a fairly well-established consensus that it is greater than 1, perhaps around 1.4, but possibly as large as 2 (see, e.g., Freeman, 1986, Katz and Murphy, 1992, Angrist, 1995, =-=Card and Lemieux, 2001-=-). Hence, in the empirical exercise I will use σ = 1.4 and σ = 2 as two reference values. Now define ∆k as the k-period difference operator, i.e., ∆kx ≡ x (t)− x (t− k) . Then, predicted changes in th...

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...ds on a framework I developed in Acemoglu (1999a), and combines it with some of the insights of the literature on training investments in the presence of labor market frictions (e.g., Acemoglu, 1997, =-=Acemoglu and Pischke, 1998-=-, 1999). The basic idea is that in a labor market with wage bargaining, the incentives of firms to invest in new technologies is affected by the degree of wage compression. In particular, greater wage...

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...d workers. Next, consider the case: (1− β)αAhu > k. (17) 11More formally, I’m assuming that wages are determined by outside-option bargaining as in Rubenstein (1982) and Shaked and Sutton (1984) (see =-=Acemoglu, 1996-=-, for a justification in the search equilibrium context). 19 This condition ensures that firms are happy to adopt a new technology even with unskilled workers. Clearly (17) immediately implies that (1...

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...rgensen and Stiroh (2000) and the discussion in Acemoglu (2002a). 21 This is consistent with the fact that unemployment both among low and high education workers in the US increased during the 1980s (=-=Acemoglu, 1999-=-a). F142 [ F E B R U A R YT H E E C O N O M I C J O U R N A L Royal Economic Society 2003 technologies only with skilled workers, and as a result, the relative productivity of skilled workers and th...

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...e Relative-Supply-Demand Framework I now develop the relative-supply-demand framework in more detail for a quantitative evaluation of the traditional explanation. Consider the following simple model (=-=Welch, 1970-=-; Katz and Murphy, 1992; Acemoglu, 2002a): there are two types of workers, unskilled (low-education) workers and skilled (high-education) workers. I denote the employment of unskilled and skilled work...

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...picts the case in which there is no change in the skill premium in Europe.2 Probably the more popular explanation among economists and commentators is the second one above (Krugman, 1994; OECD, 1994; =-=Blau and Kahn, 1996-=-). To capture this story, imagine that wage-setting institutions in Europe prevent wage inequality from increasing — for example, because of union bargaining, unemployment benefits, or minimum wages t...

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...surance programmes, are probably at the root of this wage compression. 23 This wage rule follows from a straightforward application of the Rubinstein (1982) bargaining model with outside options (see =-=Shaked and Sutton, 1984-=-). 2003] F143C R O S S - C O U N T R Y I N E Q U A L I T Y T R E N D S Royal Economic Society 2003 ð1sbÞaAhusk > bAhusw: ð27Þ Assumption (23), which meant that the wage floor was binding for unskill...

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...the wages of comparable workers in the US. All three premises are plausible. The finding of high correlation between wages and firms’ profitability or investments both in union and non-union sectors (=-=Katz and Summers, 1989-=-; Groshen, 1991; Blanchflower et al., 1997) support the view that there is some amount of rent-sharing. That technology adoption is endogenous is close to the heart of many economists, and in previous...

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...mprovement of new technologies slower today than in the 1950s and 1960s. Although this runs counter to the general belief among economists who view the 1980s as times of rapid technological advances (=-=Caselli, 1999-=-; Greenwood and Yorukoglu, 1997; Hornstein and Krusell, 1996; Galor and Moav, 2000), it is quite plausible. Notice, for example, the widespread slowdown in the rate of growth of TFP and the evidence t...

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...though this runs counter to the general belief among economists who view the 1980s as times of rapid technological advances (Caselli, 1999; Greenwood and Yorukoglu, 1997; Hornstein and Krusell, 1996; =-=Galor and Moav, 2000-=-), it is quite plausible. Notice, for example, the widespread slowdown in the rate of growth of TFP and the evidence that industries adopting many of these new technologies had slower than usual produ...

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...This theory builds on a framework I developed in Acemoglu (1999a), and combines it with some of the insights of the literature on training investments in the presence of labor market frictions (e.g., =-=Acemoglu, 1997-=-, Acemoglu and Pischke, 1998, 1999). The basic idea is that in a labor market with wage bargaining, the incentives of firms to invest in new technologies is affected by the degree of wage compression....

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...an in the 1950s and 1960s. Although this runs counter to the general belief among economists who view the 1980s as times of rapid technological advances (Caselli, 1999; Greenwood and Yorukoglu, 1997; =-=Hornstein and Krusell, 1996-=-; Galor and Moav, 2000), it is quite plausible. Notice, for example, the widespread slowdown in the rate of growth of TFP and the evidence that industries adopting many of these new technologies had s...

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...lausible. Notice, for example, the widespread slowdown in the rate of growth of TFP and the evidence that industries adopting many of these new technologies had slower than usual productivity growth (=-=Brendt et al., 1994-=-). Moreover, as Gordon (1998) argues it seems plausible that the new technologies of the 1980s and the 1990s, such as computers and information technology, may not have improved our productive capacit...

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...pply-Demand Framework I now develop the relative-supply-demand framework in more detail for a quantitative evaluation of the traditional explanation. Consider the following simple model (Welch, 1970; =-=Katz and Murphy, 1992-=-; Acemoglu, 2002a): there are two types of workers, unskilled (low-education) workers and skilled (high-education) workers. I denote the employment of unskilled and skilled workers in country j at tim...

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...efore. In fact, Figure 1 depicts the case in which there is no change in the skill premium in Europe.2 Probably the more popular explanation among economists and commentators is the second one above (=-=Krugman, 1994-=-; OECD, 1994; Blau and Kahn, 1996). To capture this story, imagine that wage-setting institutions in Europe prevent wage inequality from increasing — for example, because of union bargaining, unemploy...

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...es of comparable workers in the U.S. All three premises are plausible. The finding of high correlation between wages and firms’ profitability or investments both in union and non-union sectors (e.g., =-=Katz and Summers, 1989-=-, Groshen, 1991, Blanchflower, Oswald, and Sanfey, 1997) support the view that there is some amount of rent-sharing. That technology adoption is endogenous is close to the heart of many economists, an...

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...quality trends, I use data from Luxembourg Income Study (LIS) dataset (see, for example, Gottschalk and Smeeding, 1997, for an investigation of cross-country income inequality using this dataset, and =-=Gottschalk and Joyce, 1998-=-, for an investigation of differences in wage inequality). Because LIS data for different countries refer to different years, I combine these with the March Current Population Surveys (CPS) for the co...

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...rgensen and Stiroh (2000) and the discussion in Acemoglu (2002a). 21 This is consistent with the fact that unemployment both among low and high education workers in the US increased during the 1980s (=-=Acemoglu, 1999-=-a). F142 [ F E B R U A R YT H E E C O N O M I C J O U R N A L Royal Economic Society 2003 technologies only with skilled workers, and as a result, the relative productivity of skilled workers and th...

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...workers in the US. All three premises are plausible. The finding of high correlation between wages and firms’ profitability or investments both in union and non-union sectors (Katz and Summers, 1989; =-=Groshen, 1991-=-; Blanchflower et al., 1997) support the view that there is some amount of rent-sharing. That technology adoption is endogenous is close to the heart of many economists, and in previous work, Acemoglu...

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... at the bottom of the distribution in Europe. They show that 15This is consistent with the fact that unemployment both among low and high education workers in the U.S. increased during the 1980s (see =-=Acemoglu, 1999-=-a). 22 although wage differentials between the 90th and the 50th wage percentiles are similar across countries, the differential between the 50th and 10th percentiles is much larger in the U.S. than E...

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...echnical change (Acemoglu, 2002a). But the case with r < 1 is not of great empirical relevance in the context of skilled and unskilled workers, since almost all existing estimates suggest that r > 1 (=-=Freeman, 1986-=-; Hamermesh, 1993). Let us start with a relatively weak form of the common technology assumption. In particular, suppose that A j hðtÞ gjhhjðtÞAhðtÞ and Ajl ðtÞ gjlhjðtÞAlðtÞ: ð5Þ This assumption ...