Institutions, Technological Change and the Wage Differentials Between Skilled and Unskilled Workers: Theory and Evidence from Europe

We study the evolution of the wage differentials between graduate (skilled) and non graduate (unskilled) workers in several european countries in the period that range from the beginning of the nineties to the beginning of this century. The starting point is that all european countries show an increasing relative supply of skilled workers but different behaviours of the wage differentials. The standard explanation for non decreasing differentials in the face of rising relative supply is that technological progress is skill biased. This in turn would imply that technological progress differs in its magnitude and effects across Europe. Our finding shows that what is relevant in the determination of the differentials it is the pace and intensity at which technological progress takes place. We turn then to institutions and we build a model of imperfect competition and wage bargaining which relate the differentials to the technological progress but also to several labour market institutions. The empirical analysis on this aspect reveal that employment rates of different groups as well as the union density and the generosity of unemployment benefits are indeed important and help in explaining the evolution of the wage differentials between skilled and unskilled workers.