Skill-Biased Technological Change and Wage Inequality: Evidence From A Plant Retooling

By Roberto M. Fernandez
1999| Working Paper No. 1600

One of the most popular explanations of the increased wage inequality that has occurred since the late 1970s is that technological change has resulted in a downward shift in the demand for low-skill workers. Such a pattern is also alleged to account for the growth in racial inequality in wages that has been observed over the same period. Most studies of skill biased technological change use broad, supply-side data sources with only shallow data on technology and skills. As a consequence, these studies suffer from overly simple notions of technological change, poor measures of skill, or both. While such studies attempt to simulate a demand-side shift in the need for skills, because of the problem of self-selection of individuals into jobs that use the technology, it is questionable whether these studies can ever isolate the effects of technology per se. In this paper, we solve these conceptual and empirical problems in the context of a case study of the retooling of a food processing plant. Using a unique, longitudinal, multi-method design, we study the nature of the technological change, the changes in job requirements, and the mechanisms by which the technological changes affect the wage distribution for hourly production workers. Most important, because the retooling constitutes an exogenous demand-side shift in the labor market for this companys workers, our natural experiment design solves the self-selection problem which plague past skill-bias studies. We find that indeed the retooling resulted in greater wage dispersion of the form predicted by the proponents of the skill-biased technological change argument, and that the technological changes have also been associated with greater racial inequality in wages. However, organizational and human resources factors strongly mediated the impact of the changing technology. Absent these high road organizational choices, the impact of the technological change on the wage distribution would have been even more extreme.