Skill-Replacing Technology and Bottom-Half Inequality

I propose a model of a skill-replacing routine-biased technological change (SR-RBTC). In this model, technology substitutes the usage of skill in routine tasks in contrast to standard RBTC models, which assume technology replaces the workers themselves.

The SR-RBTC model explains three key trends that are inconsistent with standard RBTC models: 1) why specifically middle wages declined even though workers in routine occupations are dispersed across the entire bottom half of the wage distribution, 2) why middle wages stopped declining while the technological change continued, and 3) why there is no substantial decline in the average wage of workers inroutine occupations. I derive two new testable predictions from the model: a decreasein return to skill and a decrease in skill level in routine occupations. I use an interactive fixed-effects model to confirm both predictions.

Since SR-RBTC violates the ignorability assumption required by standard decomposition methods, I introduce a “skewness decomposition” to show that SR-RBTC is the main driver of bottom-half inequality trends.

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