IZA DP No. 1107: The Diffusion of Computers and the Distribution of Wages
published in: European Economic Review, 2007, 51 (3), 715-748
When workers adopt technology at the point where the costs equal the increased productivity, output per worker increases immediately, while the productivity benefits increase only gradually if the costs continue to fall. As a result, workers in computer-adopting labor market groups experience an immediate fall in wages due to increased supply. On the other hand, adopting workers experience wage increases with some delay. This model explains why increased computer use does not immediately lead to higher wage inequality. More specifically, the results of the model are shown to be consistent with the question why withingroup wage inequality among skilled workers as a result of computer technology adoption in the United States increased in the 1970s, while between-group wage inequality and withingroup wage inequality among the unskilled did not start to increase until the 1980s. The model also suggests that the slow diffusion of computer technology in Germany along with the absence of major changes in the wage structure in the 1980s is consistent with the more compressed German wage structure. Finally, the theoretical predictions seem to be of the right magnitude to explain the empirical quantities observed in the data.