Employment Effects of Skill-Biased Technical Change When Benefits are Linked to Indices of Standards of Living
This paper studies the employment effects of skill-biased technological change under the assumption that the level of social security benefits depends on the general income level in the economy. In models of wage bargaining, wages---especially at the lower end of the wage distribution---typically depend on the level of unemployment or social security benefits. These benefits are generally considered exogenous. In practice, however, benefits are often linked to indices of standards of living. Endogeneity of the level of benefits leads to an interdependence between wages and benefits. As a consequence, the wage for unskilled labor is linked to the wage for skilled labor. Technological change is shown to have employment effects (only) if it is ``skill-biased'' AND if this link between the wages for different skills exists.
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