Skill-biased technical change and labor market inefficiency

The economic literature has so far produced limited (country-level) evidence on the magnitude of skill-biased technical change (SBTC), and has not yet investigated the extent to which, coupled with labor market imperfections, SBTC is associated with inefficient use of labor. We present a novel approach to estimate SBTC allowing for the presence of labor market inefficiency. Using data taken from the World Input-Output Database across 38 countries and 30 sectors, we provide the first country-sector evidence of SBTC during the 1995-2005 period and quantify the extent of economic inefficiency arising from labor market imperfections. On average, we find that the productivity of skilled workers grows by approximately 11.5% more than that of unskilled workers, mostly driven by SBTC (13.7%), rather than factor accumulation (-2.1%). Economic inefficiency decreases by 10.5% on average, and labor market rigidities are more binding in sectors that are more exposed to technological change. Substantial heterogeneity is also observed. (C) 2022 Elsevier B.V. All rights reserved.