Skill-Biased Technological Change in Small Open Economies : Accounting for Changing Employment and Wage Structures of Korea

The recent decades have witnessed changing employment structures combined with rising earnings inequality. Skill-biased technological change (SBTC) has been proposed as a driving force in the literature. We reexamine the effects of SBTC in a small open economy context where the capital market and part of the labor market are integrated into world markets. (i) We first construct a simple equilibrium model of a small open economy with mobile capital. Then (ii) we extend the basic model to analyze the effects of factor market openness. From calibration, we find that the effects of SBTC exist in the small open economy and could be larger than those of a closed economy. Moreover, we provide empirical evidence from the KLIPS data which supports the results from calibration analysis. Our regression analysis demonstrates that the skill premium is larger in the high-tech industries that are more likely to be affected by SBTC. Some implications are discussed