The Impact of Technical Progress on the Structure of Employment and Wages with Respect to Qualifications.

In Germany, the skill structure of wages remained stable in the last two decades while employment of the low skilled deteriorated considerably relative to employment of the high skilled. This paper analyses the impact of technical progress on the skill structure of employment and wages by means of an insider-outsider-variant of a right-to-manage model. While wages of high skilled employees is determined on a competitive labor market, wages for all other skill groups are subject to a Nash bargaining between unions and the firms. The econometric evidence presented is based on West German manufacturing data at the one-digit level. A semi-structural model is estimated which is sufficiently flexible to be regarded as a second order approximation of a general union preference function. The approach enables us to identify the indirect effects of technical progress on employment resulting from the bargaining process. These indirect effects prove to be quantitatively important. In some industries job losses due to technical progress for the low skilled relative to the high skilled are generated through counter acting wage policies. The findings support the view that insider-outsider mechanisms are operating on the German labor market.