Chapter 20 The Effects of Technical Change on Labor Market Inequalities

Andreas Hornstein, Per Krusell, Giovanni L. Violante

Research output: Chapter in Book/Report/Conference proceedingChapter

92 Scopus citations


In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labor market. A key focus is on the rise of U.S. wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase in unemployment and an increased labor share of income, variables that remained stable in the U.S. We hypothesize that these changes in labor market inequalities can be accounted for by the wave of capital-embodied technological change, which we also document. We propose a variety of mechanisms based on how technology increases the returns to education, ability, experience, and "luck" in the labor market. We also discuss how the wage distribution may have been indirectly influenced by technical change through changes in certain aspects of the organization of work, such as the hierarchical structure of firms, the extent of unionization, and the degree of centralization of bargaining. To account for the U.S.-Europe differences, we use a theory based on institutional differences between the United States and Europe, along with a common acceleration of technical change. Finally, we briefly comment on the implications of labor market inequalities for welfare and for economic policy.

Original languageEnglish (US)
Title of host publicationHandbook of Economic Growth
PublisherElsevier B.V.
Number of pages96
ISBN (Print)9780444520432
StatePublished - 2005
Externally publishedYes

Publication series

NameHandbook of Economic Growth
ISSN (Print)1574-0684

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


  • inequality
  • institutions
  • labor market
  • skills
  • technological change


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