The Hidden Increase in Wage Inequality: Skill-Biased and Ability-Biased Technological Change

Abstract

This study provides strong evidence for an increase in wage inequality induced by skillbiased technological change in the UK manufacturing industry between 1991 and 2006. Using individual level data from the BHPS and industry level data from the OECD, wage regressions are estimated which identify the effect of innovative activity on wages - the personal innovation wage premium - for university and less educated workers. Innovative activity is defi ned by R&D expenditure and patent applications to measure innovation input and innovation output, respectively. Using diff erent estimation methods for panel data, such as Fixed effects, Random effects, Mundlak and Hausman-Taylor models, additionally to pooled OLS allows controlling for both industry-specific and individual ability. Using R&D expenditure as a measure for innovative activity additionally provides evidence for ability-biased technological change while patent applications do not support this hypothesis.