Looking Back, Looking Ahead : Biased Technological Change, Substitution and the Wage Gap - Comment

In his paper ‘‘Looking Back, Looking Ahead: Biased Technological Change, Substitution and the Wage Gap'' Theo van de Klundert employs a two-goods, two-factors general equilibrium model, applying the powerful "hat calculus technique" introduced by Meade (1961), to study the determinants of the wage gap. The main result is summarized by his Eq. (18), which shows that the change in the wage gap can be decomposed into four components: (i) the effect due to changes in the relative factor supply; (ii) the effect due to factor-biased technological change; (iii) the effect due to a change in goods demand resulting from income growth; and (iv) the effect due to a change in goods demand resulting from goods substitution. This kind of analysis is very important and truly instructive. The recent literature on the wage gap (or the skill premium) has offered a bunch of explanations for the observation of rising wage inequality in the USA over the period 1960–1990. However, the interplay between sectoral change driven by technological factors and sectoral change driven by preferences has hardly been discussed in this context. This is surprising to the extent that there are a number of models on sectoral change and economic growth, which could be used to investigate the importance of preferences and technological factors for the evolution of the skill premium (e.g. Kongsamut et al., 2001; Foellmi and Zweimueller, 2006). My main point is to illustrate that van de Klundert's (2007) contribution is not only instructive when it comes to understanding the economic forces behind the rise in the skill premium. It also has the potential to explain an important and widely recognized empirical regularity on the evolution of the skill premium. This is expressed, for instance, by Hornstein et al. (2006, p. 6) who notice that "... the time series for inequality over the past 100 years is 'U-shaped'" when surveying the recent literature on wage inequality in the USA