Skill Polarization in Local Labor Markets under Share-Altering Technical Change

This paper considers the “share-altering” technical change hypothesis in a spatial general equilibrium model where individuals have different levels of skills. Building on a simple Cobb-Douglas production function, our model shows that the implementation of skill-biased technologies requires a sufficient proportion of highly educated individuals. Moreover, when technical progress disproportionately replaces middle-skill jobs, the local distribution of skills will exhibit “fat-tails”, where the proportion of both highly skilled and low-skilled workers increases. These and several other predictions of the model are consistent with recent existing evidence, and avoid some major criticism against the “canonical” CES framework.