Skilled labor reallocation, wage inequality, and unskilled unemployment

This paper analyzes the labor market effects of an increase in incentives in raising total factor productivity and, thus, reallocating high-skilled labor from production to non-production (i.e., R&D) activities. Within an endogenous growth framework, it is shown that such a reallocation of skilled labor depresses the demand for low-skilled labor. Contrary to the standard view of skill-biased technological change, the relative marginal productivity of labor changes only because of relative employment effects. Moreover, the impact of social comparisons between high-skilled and low-skilled workers and within the group of low-skilled workers are examined.