published in: European Economic Review, 2007, 51 (3), 715-748
When workers adopt technology at the point where the costs equal the increased
productivity, output per worker increases immediately, while the productivity benefits increase
only gradually if the costs continue to fall. As a result, workers in computer-adopting labor
market groups experience an immediate fall in wages due to increased supply. On the other
hand, adopting workers experience wage increases with some delay. This model explains
why increased computer use does not immediately lead to higher wage inequality. More
specifically, the results of the model are shown to be consistent with the question why withingroup
wage inequality among skilled workers as a result of computer technology adoption in
the United States increased in the 1970s, while between-group wage inequality and withingroup
wage inequality among the unskilled did not start to increase until the 1980s. The
model also suggests that the slow diffusion of computer technology in Germany along with
the absence of major changes in the wage structure in the 1980s is consistent with the more
compressed German wage structure. Finally, the theoretical predictions seem to be of the
right magnitude to explain the empirical quantities observed in the data.
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