New Technologies and the College Premium

Abstract:

This paper shows that the pace of technology creation is a key driver of wage inequality. It develops a model where college-educated workers learn how to use new technologies faster than others, and where this advantage dissipates over time as technologies become standardized and easier to use. In equilibrium, the college wage premium is determined by the interplay between the pace of technology creation and standardization. A heightened pace of technology creation causes a long-lasting increase in the college premium. We calibrate the model using novel text-based data on new technologies and their changing demand for skills as they age. These data show that new technologies initially require more college-educated workers but see a reversal as they age. The data also point to an increased rate of new technology creation starting in the 1980s and tapering off in the 2000s. In response to this measured acceleration in the pace of technology creation, the model generates a 25 log point increase in the college premium that begins to revert in the 2010s. In extensions, we allow new technologies to diffuse from dense to lower-density cities, and younger workers to have a comparative advantage in new technologies. These extensions explain why the college premium is generally higher in dense cities, why its increase was mainly an urban phenomenon, and why it had a marked age pattern, rising first for young workers and then for older workers.