Rising Wage Inequality: The Impact Of Employers” Investment In New Technology

Rising wage inequality among American men is associated with increasing inequality of investment in physical capital across firms, according to new research by Marco Leonardi. His study, published in the March 2007 issue of the Economic Journal, finds evidence that workers get paid unequal wages because they work in firms that are
becoming more diverse in terms of investment in computers per worker.

The large increase in wage inequality in the United States in the past 25 years is well known. In the 1990s, the increase was concentrated in the upper part of the wage distribution, that is, the distance between the very rich and the middle class.

There is some consensus among economists that changes in institutions (like the minimum wage) provide a good explanation of the evolution of wage inequality at the bottom of the wage distribution, while ”skill-biased technical change” (technological change in favour of workers with higher education) is needed to explain the increase at
the top of the distribution.

Among the possible explanations, there is an ”asymmetric” version of skill-biased technical change, according to which computerisation raised the demand for nonroutine skills (which cannot be substituted by computers) and favoured workers at the top and at the bottom of the wage distribution relative to those in the middle. This is
because workers with non-routine skills are concentrated in low-wage service jobs and in high-wage manufacturing and service jobs.

This view implies that computers penetrated different firms (or jobs) in different ways and ”polarised” the labour market between workers who could take advantage of new technologies – or at least could not be substituted by them – and those who were substituted.

This study uses firm-level data to examine to what extent the inequality of capital intensity (the investment in computers per each employed worker) across firms is correlated with wage inequality. The results show that:

  • Inequality of capital intensity across firms increased by about 16 percentage points from the early 1970s to 2002 in a panel of listed US companies.
  • Inequality in capital intensity is significantly associated with an increase in wage inequality for males at the top of the wage distribution. The results for females are less clear-cut. The difficulty in interpreting the results on the female wage distribution may be due to the large changes in female labour force participation in this period.
  • The industries where the price of capital equipment (computers) declined more rapidly are also the industries that have larger increases in inequality of capital investment across firms.

A plausible explanation of these three findings is that firms that were already capitalintensive took advantage of the decline of the price of computer capital and increased their investment (and average wages) relative to other firms. As a result, the industries where firms became more diverse in terms of capital investment were also the same
industries where wage inequality increased the most.

”Firm Heterogeneity in Capital-labour Ratios and Wage Inequality” by Marco Leonardi is published in the March 2007 issue of the Economic Journal.

Marco Leonardi

University of Milan | +39 338 632 5350 | marco.leonardi@unimi.it