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ECON 699 Proposal: Was Technology Skill-Biased in the Atlantic Merchant Marine, 1863 to 1913? BINGLING KONG Advisor: Dr. David Mitch Instructor: Dr. Brad Humphreys1. Introduction Both economists and policy makers over the past twenty years have had great interest in the notion of skill-biased technical change. One source of this interest has been in issue of whether the spread of computers and information technology had had a major impact on wage structure and income distribution. According to one view skill-biased technical change increases the demand for relatively skilled workers (Autor, Katz and Krueger, 1988). With the introduction of new technology, many tasks that were previously performed by unskilled labors entail certain skills, and substitute skilled for unskilled labors. A higher demand for skills would boost the wage premium, and then exacerbate the wage inequality between skilled and unskilled workers. Skill-biased technical change is supported in some previous studies. (see Griliches 1969; Nelson and Phelps, 1967; Welch, 1970; Schultz, 1975; Tinbergen, 1975) In Figure 1, the effect of skill-biased technical change on wage structure is illustrated graphically within a constant elasticity of substitution (CES) production model.1 Suppose a two-input production function has the form,[]ρρρβα/121)()( HHV += , where αand β capture technological progress, and represent skilled and unskilled labor respectively. The elasticity of substitution between skilled and unskilled labor is1H2H)1/(1ρσ−=. and are wages paid to skilled and unskilled labor respectively. Assume profit maximization, wage premium 1W2Wω in equilibrium is given by: 1 For a formal discussion, see Sanders, M. and Weel, B. (2000) ‘Skilled-Biased Technical Change: Theoretical Concepts, Empirical Problems and a Survey of the Evidence,’ DRUID working paper, number 00-8. 2(1) 12121−⎟⎟⎠⎞⎜⎜⎝⎛⎟⎟⎠⎞⎜⎜⎝⎛==ρρβαωHHWW In this simple scenario, Hicks-neutral technical change can be defined as an increase in productivity that impacts relative wages holding the labor ratio constant; or equivalently impacts relative labor employment holding wages constant. Equation (1) implies that technical change is Hicks neutral as long as αandβ change proportionately. (Sanders and Weel, 2000) Figure 1: Skill-Biased Technical Change Holding the Factor Ratio Constant Figure 1 assumesβα> , that is, technical change is skilled biased against unskilled labor. Holding the factor ratio constant, as shown by a straight ray from the origin, technical change shifts the production frontier to the left, to . From the slopes of tangent lines, we can easily tell a decline in relative wages , which is against unskilled labors. Alternatively, we could show an increase in the employment of 21/ HH0V1V)/(12WWH1/H2 H1 H2V1V0H1(W2/W1)0(W2/W1)1 3skilled labors holding relative wages constant. However, technical change can be unskill-biased as well. During the nineteenth century in Britain, products normally made by skilled artisans started to be produced in factories by relatively unskilled workers using machines. Formerly complex tasks were greatly simplified with machines involved in the production, reducing the demand for skilled workers. (James and Skinner, 1985; Goldin and Katz, 1998; Mokyr, 1990) Since technical change has an important impact on wage structure and employment, it is worthwhile to explore whether technical change is skill or unskill biased. In Hudgins and Mitch’s capstone paper (2003), they mainly examined the trends in the premium to literacy in the Atlantic Merchant Marine from 1863 to 1913, and found that the premium is higher for steam crew than sail, based on which they argue that the introduction of steam could be viewed as skill-biased technical change. Nonetheless, they failed to provide an explanation of why the change in the wage premium to literacy is attributed to skill-biased technical change rather than some other factors. Neither did they discuss why it is the case that the technical change in Atlantic Merchant Marine is skill-biased. This question serves as an immediate goal in this paper. Acemoglu (2002) has developed a model in which elasticity of substitution σ between skilled and unskilled labor can be used to determine whether or not technical change is skill-biased. He has shown that elasticity of substitution σ determines slopes of the relative labor demand curve. In general, 1>σ indicates that technology is skill biased; 1<σ unskill biased. This model will be presented in detail in the next section. 4Using the same dataset in Hudgins and Mitch’s paper (2003), I will attempt to estimate the elasticity of substitution σ in the Atlantic Merchant Marine from 1863 to 1913, and test the null hypothesis 1>σ, that is, technical change is skill-biased. Since most previous studies apply data to a whole economy level, it is also intriguing to see how σ performs within an industry facing a concrete type of technical change. The rest of this proposal will be organized as follows. Section 2 will discuss the role of elasticity of substitution in labor supply and demand, and lay out a methodology framework, modeling voyages in the Atlantic Merchant Marine in a general production function. Then, I will look closely at the dataset, produce some descriptive statistics, and discuss empirical models. Finally, I will discuss the remaining tasks for the fulfillment of the final paper. 2. Methodology and Hypothesis It is beneficial to discuss elasticity of substitution in a partial equilibrium. Recall the production function derived in the first section. By taking natural logs of both sides of Equation (1) and substituting )1/(1ρσ−=, I obtain:2 (2) ⎟⎟⎠⎞⎜⎜⎝⎛−⎟⎟⎠⎞⎜⎜⎝⎛−=21ln1ln1lnHHσβασσω In general, skill premium increases when skilled labor becomes scarcer, indicating a negative slope for the relative demand curve with the value of σ/1 , that is: 2 For detailed derivation, see Acemoglu, D. (2002), ‘Technical Change, Inequality, and the Labor Market,’ Journal of Economic Literature, Vol. XL: 7–72. 501/lnln21<−=∂∂σωHH βα/ captures technical change over time. In this model, elasticity of substitution σ determines the slope for the relative demand as well as the intercept term. Graphically, I can show the relationship between skill premium and relative labor demand in Figure 2.


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UMBC ECON 699 - LECTURE NOTES

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