Technology Diffusion and Its Effects on Social Inequalities

We develop a dynamic general-equilibrium model in which growth is driven by a skill-biased technology diffusion to reproduce trends in the income inequality, and the labor and skills supplies of the United States between 1969 and 1996. We incorporate education and leisure–labor decisions, and human-capital accumulation. We provide an explanation to why individuals invest in human capital when the investment premium is going down and why the skill-premium is going up when the skills supply is increasing. In addition, our model is the first general-equilibrium model, to our knowledge, that is consistent with a decline of unskilled wages and low growth of productivity in which the effects of a skill-biased technology diffusion on social inequalities are studied. We show that the effects of labor supply decisions on the skill premium cannot be neglected in a diffusion model.