IZA DP No. 281: Information Technology and the Knowledge Elites
published in: Journal of Economic Theory, 2007, 137 (1), 104-126
I study a model where Information Technology, while typically increasing overall inequality, is likely to harm some people at intermediate and high levels of the distribution of income but to benefit people at the bottom. Within a given occupation it may harm some workers while benefitting others; and it may either reduce or increase the proportion of knowledge workers in employment. In my model, knowledge (in a broad sense) is an input into the production function of human capital, and is also a "quality" good in the sense that one cannot buy it from several low-quality producers instead of one high-quality one. People differ in their exogenous ability and ability is complementary with the quality of the knowledge input in the production of human capital. An improvement in IT is modelled as an increase in the number of people who can buy knowledge from one producer. I show that the economy organizes itself in a succession of clusters of ability levels, called "knowledge ladders", where a member of a given ladder buys knowledge from a worker in the subsequent ladder and sells it to a worker of the preceding ladder. The return to human capital increases as one moves up the knowledge ladder. The economic mechanism considered here rests on the view that IT makes the acquisition of knowledge cheaper, which intensifies competition among workers specialized in knowledge production. Those who lose in such competition end up displaced to occupations with a lower knowledge intensity; their wages fall, which reduces inequality between them and the least skilled. Those who win can spread their ability over a larger market and because of that enjoy a larger increase in wages than the least skilled, which tends to increase inequality. The least skilled do not participate in this competition, as they are not specialized in knowledge production; they gain in absolute terms because of their cheaper access to knowledge.