The skill premium, technological change and appropriability

Skill-biassed technological change is now generally seen as the dominant explanation, which calls for theories to explain the bias. This paper shows that the increased supply of skill - which is usually seen as countervailing the rise in skill premiums - can actually cause rising skill premiums. The analysis starts from an R&D-driven endogenous growth model. Our key assumption is that skilled labour is employed in non-production activities that both generate and use knowledge inputs. If firms can sufficiently appropriate the intertemporal returns from these activities, that is, knowledge that is accumulated is sufficiently tacit, skill premiums may rise with the supply of skilled labour. The degree of appropriability is endogenous, which means that firms can choose to accumulate tacit versus codified knowledge. We show that the degree of appropriability rises with the supply of skills. As a result, the skill premium first falls and then increases when skilled labour supply rises. Simultaneously, patents per dollar spent on R&D fall.