Cover: Technological Change and the Skill Premium

Technological Change and the Skill Premium

21st Century Evidence

Published Feb 9, 2021

by Jesse Lastunen

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Technological change in the 21st century is predominantly characterized by digitalization, or the use and development of information and communication technologies at companies. While digitalization facilitates economic progress, there is a growing concern about its effects on labor market disparities. In this dissertation, I document recent changes in labor outcomes by education and offer insights into the role of digitalization in shaping these trends.

First, I show that the earnings premium for higher education has increased since the 2008 financial crisis. Among those with advanced degrees, technical majors accounted for the entirety of this growth. The gaps between education groups also increased the most in high-technology industries and occupations. In addition to documenting these trends, I examine how premiums have reacted to changes in the labor force composition. I show that the skill premium has increased despite rapid growth in the supply of skilled labor, suggesting that the demand for skill is rising.

In subsequent chapters, digital advances are explored as a candidate explanation for this trend. I use variation in technology and labor market outcomes across industries, regions and individuals to study the effects of two complementary proxies of digitalization — investment in information technology and value added from digital goods. The analysis points to a positive impact of both proxies on earnings that increase with education and are concentrated in high-technology sectors. A causal interpretation of the differential effects of digitalization is bolstered by an instrumental variable approach and the limited impact of placebo regressors on the earnings premiums. While the two digitalization proxies amplify skill-based disparities in earnings, no education group is negatively affected by them in absolute terms.

Finally, I assess policies that could reduce earnings disparities without slowing down the development of digital technologies or productivity growth more broadly. One effective solution would be to expand the number of skilled workers in the country. In a simple quantitative exercise, I show that relatively modest annual increases in the university-educated workforce could considerably moderate the skill premium. I offer practical recommendations on immigration and education policy to advance this goal in the coming decades.

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This document was submitted as a dissertation in May 2020 in partial fulfillment of the requirements of the doctoral degree in public policy analysis at the Pardee RAND Graduate School. The faculty committee that supervised and approved the dissertation consisted of Krishna B. Kumar (Chair), Shanthi Nataraj, Philip Armour, and Raffaele Vardavas. Sgouris Sgouridis, Director of Research Programs at DEWA in Dubai, was the external reader for the dissertation.

This publication is part of the RAND dissertation series. Pardee RAND dissertations are produced by graduate fellows of the Pardee RAND Graduate School, the world's leading producer of Ph.D.'s in policy analysis. The dissertations are supervised, reviewed, and approved by a Pardee RAND faculty committee overseeing each dissertation.

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