The Skill Premium in Times of Rapid Technological Change

This paper shows that the pace of technology creation is a key driver of the skill premium. It develops a model in which skilled workers have a comparative advantage in learning new technologies. As technologies age, they become standardized and accessible to other workers. The skill premium is determined by the interplay between the pace of technology creation and standardization. A rapid pace of technology creation leads to a sustained increase in the skill premium. We calibrate the model using novel text-based data on new technologies and their changing demand for skills as they age. These data show that new technologies are initially skill intensive but become less so as they age. The data also point to an increased pace of new technology creation starting in the 1970s and tapering off in the 2000s. In response to this rapid pace of technology creation, the model generates a 32 percent increase in the college premium, which begins to reverse in the 2010s. Our framework also explains why the college premium is higher in dense cities, why its increase was mainly urban, and why it rose first for young workers and later for older workers.