Technological Change and Income Distribution in Europe

By Perugini, Cristiano; Pompei, Fabrizio | International Labour Review, June 2009 | Go to article overview

Technological Change and Income Distribution in Europe

Perugini, Cristiano, Pompei, Fabrizio, International Labour Review


This article provides empirical evidence of the link between technological change and overall income inequality in 14 EU countries. The analysis begins by testing the skill-biased technological change (SBTC) hypothesis in sectors with different levels of technology intensity. After confirming the skill complementarity of technology and the predominantly skill-replacing character of investment, the analysis turns to sectoral changes in skilled-labour demand as a possible determinant of income inequality. It finds a non-linear relationship between SBTC and inequality in five of the eight sectors considered, suggesting an inverted U-shaped pattern that can be explained by stages in labour demand and supply adjustments over time.

There is increasing interest in the impact that skilled labour demand and returns to skills have had on distributive patterns in recent years. Since the 1990s, theoretical and empirical studies, often focused on the United States, have highlighted the importance of technological determinants of trends in earnings inequality (Levy and Temin, 2007; Glaeser, 2005; Pianta, 2003; Slottje and Raj, 1998; Levy and Murnane, 1992; Katz and Murphy, 1992). Acemoglu (1998 and 2005) and many others have explained why technological change has distribu- tional implications. And if some factors of production benefit to the detriment of others, it is clearly important to ascertain which groups will be the winners and which the losers and, in turn, how this process affects overall economic inequality among and within countries. However, Atkinson (2007) showed that, in a dynamic perspective, skill-biased technological change (SBTC) may cause only a temporary shock on earnings dispersion: wage differentials initially widen, but in the long run, the "fanning out" of these differentials could vanish as the supply of skilled labour catches up with demand.

Starting from these considerations, this article aims to shed light on the complex relationships between technological change, quantitative and qualitative labour demand dynamics, and income (not simply earnings) distribution. We first build the theoretical framework for our analysis by considering the vast literature dealing with the many economic, demographic and institutional factors that affect income inequality within countries; then, we focus on the role played by technological change, via effects on labour demand. Our empirical analysis, which covers 14 countries of the European Union (EU) for the period 1995-2001, consists of two connected stages. In the first, we analyse the effects of technological change on demand for high-skilled labour (proxied by the proportion of skilled labour in total employment). Here, a distinctive characteristic of our approach is that the analysis of SBTC is broken down by sector in order to highlight those particular manufacturing or service sectors in which skilled employment ratios changed most markedly. Indeed, the specific features of different industries - particularly their intrinsic technology intensity - suggest that their patterns of development may differ widely not only over time, but also across space, depending on the position of the economy in which they operate in terms of the international division of labour. This aspect is particularly important when countries at different stages of economic development are included in the analysis, as is the case here.

In the second stage of analysis, we seek to provide empirical evidence of the impact of these sector-specific demand dynamics on overall income inequality (rather than on earnings inequality, as is usually done in such research). This is the major innovation of this article in attempting to answer the following question: if SBTC effects exist and vary across sectors, to what extent and in which direction do they affect overall income distribution? As emphasized by Atkinson and Brandolini (2006), the distribution of individual earnings is related to, but different from, household income distribution because of the effects of other income sources (capital, self-employment, rent, transfers, etc.

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