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Economic Quarterly

Fall 2003

Implications of the Capital-Embodiment Revolution for Directed R&D and Wage Inequality

Andreas Hornstein and Per Krusell

The skill premium—the wage of skilled labor relative to the wage of unskilled labor—has increased substantially in the United States since the 1970s. The higher skill premium has been attributed to skill-biased factor-specific technical change or to capital accumulation when skilled labor is relatively more complementary to capital than is unskilled labor. The authors describe an economic mechanism through which factor-specific technical change and capital accumulation respond to changes in the rate of capital-embodied technical change, and they trace out how accelerated capital-embodied technical change increases the skill premium in the medium and long run.

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