reasons: first, as well recognized in the literature, the increase in the US skill premium in the period
between the late 1970s and the 1990s cannot be attributable to a single factor. Technical change,
institutional change (i.e. minimum wages and deunionization), and globalization (i.e., North-South
and North-North trade, offshoring, and technology diffusion) all seem to have contributed to some
extent to the observed changes in the wage structure (see i.e. Di Nardo, Fortin, and Lemieux, 1996,
Autor and Katz, 1999, Card and Di Nardo, 2002, Feenstra and Hanson, 2003). Secondly, in the
literature focusing on the endogenous bias of technical change, to which our paper belongs, we either
do not find any attempt at a quantitative evaluation of the mechanism studied theoretically, or we find
quantitative evaluations supporting the view that no single source of technical change can be viewed
as “the” main factor behind wage inequality. The quantitative relevance of Acemoglu’s directed
technical change model has not being assessed yet31. The calibration in Dinopoulos and Segerstrom
(1999) shows that a decrease in the common tariff between the US and its (Northern) trade partners
from 27 percent in the 1970 to 2.5 in 1990 increases the skill premium by 4.5 percent, which account
for about 25 percent of the total increase in the skill premium. A value higher then the one we find
but surely not explaining most the observed increase in inequality.
Finally, the broad goal of this paper is that of proposing a first attempt at a quantitative evalua-
tion of the role of innovation policy in shaping technical change and the wage structure. Government
investment composition is only one part of the shift in the structure of innovation policy that took
place in the 1970s and 1980s, and we do not expect it to have a very large effect on the wage premium.
We do expect, though, that with the availability of better data (i.e. data that include the techno-
logical composition of public consumption and more disaggregated sectorial and firm-level data) the
composition of public spending together with the supply-side policies discussed in the section 2 may
explain a larger share of the increase in the US wage inequality.
7 Transitional dynamics
The model presented in this paper allows us to capture the effects of a change in the composition
of public spending on the skill premium. We have shown in the previous steady-state analysis that
permanent changes in the composition of public spending in favour of innovative goods can explain
permanent changes in the skill premium in the US between 1976 and 1991. This approximates what
happened in the economy, where of course changes in all variables have taken place more gradually.
For example, the change in government expenditure composition shown in the stylized facts section
was gradual and relatively steady. Since we are assuming rational expectations, it is desirable to
assume that the decision makers in the stylized economy we are analyzing learned at some point that
such a policy break was taking place. In fact, a sequence of surprises would hardly be consistent with
the quite regular pattern of public spending change observed in the data.
Hence, we deem it important to test our model’s prediction in the face of the assumption that
31 One reason for this is that for the source at the roots of the endogenous bias of technical change they focus on, the
increase in the relative supply of skills, to produce any positive effect on the skill premium, the elasticity of substitution
between skilled and unskilled workers must be above 2, while all ma jor estiamates point to a value around or below 1.5
(see Acemoglu, 2002a).
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