THE ROLE OF COMPUTER INVESTMENT
Striking changes in the structure of production, wages, and employment have occurred over the last several decades. The introduction of computers and, more generally, advanced technologies into the workplace is widely viewed as one of the major factors underlying these changes. In particular, the role of advanced technology and computers has been closely linked to the rising inequality of worker wages. One hypothesis is that the introduction of advanced technologies and/or computers has led to a rising demand for skilled workers which, in turn, has led to a rise in the wages of skilled workers relative to unskilled workers. Competing hypotheses concerning the source of rising wage inequality include shifts in product demand and changes in institutional factors such as the decline of unions and changes in pay norms.
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This paper attempts to shed new light on the source of these changes by exploiting establishment-level data to investigate the relationship between the dispersion of wages and the dispersion of productivity across establishments. The focus on between establishment dispersion in wages and productivity is a novel feature of our approach and analysis. This focus is motivated by recent theoretical work by Caselli (1999) and Kremer and Maskin (1996) which links the hypothesis of skill biased technical change to predictions regarding changes in wage and productivity dispersion across establishments. In principle, the rise in demand for skilled workers driven by skill biased technical change could be a within establishment phenomenon. That is, it may have been that the typical establishment experienced technological change that yielded a rising demand for skilled workers. Accordingly, the rising wage dispersion and/or any skill mix changes observed would be exhibited in the typical or average establishment. In contrast, the models of Caselli (1999) and Kremer and Maskin (1996) yield predictions that the skill biased technical change will be associated with greater dispersion in wages and productivity across establishments. This greater dispersion arises from the predictions of greater segregation in the labor market across establishments as well as related predictions about correlations between changes in wages and productivity across establishments with observable indicators of technology adoption across establishments. For example, the Caselli model suggests that changes in wage and productivity dispersion across establishments resulting from a skill-biased technical change (in this case the information technological revolution) should be related to changes in the distribution of capital in general and computers in particular across establishments. Our use of establishment-level data provides a basis for evaluating the relevance and validity of these predictions that focus on between establishment changes. In investigating this between establishment channel, we also provide another vantage point for evaluating the overall hypothesis of skill biased technical change relative to alternative hypotheses of changes in the structure of wages, productivity, and the workforce.
THE ROLE OF COMPUTER INVESTMENT