The rise of inequality in recent decades has led to the polarization of politics and social instability across developed and developing nations. Explaining the origins of the increase in inequality has become a subject of intense debate among scholars. A commonly accepted hypothesis is that new technologies are complementary to high skilled labor and at the same time tend to displace the lower skilled. This increases relative demand for the highly skilled and exacerbates inequality in labor incomes. This basic idea gives rise to a strand of the literature that examines more complex interactions between the technological environment and the allocation of workers to jobs according to their skills.
The fundamental assumption of models in this literature is the complementarity of factors. Complementarity can occur between technology and specific skills, capital and skills, or between team members. The basic outcome of complementarity is that the most efficient teams are formed only by workers with the same level of skill, that is, the segregation or stratification of skills. The intuition is that if skill levels were mixed in a given team, lower skilled workers would drag down the productivity of the highly skilled. The variation of technology in the model maintains the feature that skills are segregated but tends to amplify income inequality. The reason is technological change tends to favor highly skilled workers because for them the cost of learning the new technology is lower than the cost for low skilled workers.
These models bring about important insights for developing countries. For example, they can explain whether or not a technology developed in a developed country can actually improve the overall productivity of a developing country. It is argued that developed countries tend to create technologies that are complementary to high skilled workers. But if developing countries do not have the necessary skill base to operate the new technology, its introduction may actually lead to a relative decline in productivity. Moreover if developing countries have a smaller proportion of workers who can operate a new technology, the effect on income inequality is likely to be worse than in developed countries.
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