Endogenous skill bias

Based on a capital-skill complementarity in short-run technologies, this paper explains why technical change is rarely biased in favor of the unskilled and often against them. Firms choose the most profitable innovation out of a large set of potential innovations, some of which are more unskilled labor saving while others are more skilled labor saving. Assuming that for the production technologies known at any given point in time physical capital is a closer substitute for unskilled labor than for skilled labor, we show that technical change cannot be persistently biased against the skilled, while it can easily turn against the unskilled. No asymmetry in innovation possibilities needs to be assumed for this endogenous skill bias-to the contrary, innovation possibilities may even be strongly biased against the skilled. (C) 2004 Elsevier B.V. All rights reserved.