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Worksheet Labour Demand application (skill-biased technical change) Katz and Murphy (1992) “Changes in Relative Wages, 1963-1987: Supply and Demand Factors” OUTLINE SOLUTIONS.

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1 Seminar Worksheet Labour Demand application (skill-biased technical change) Katz and Murphy (1992) “Changes in Relative Wages, 1963-1987: Supply and Demand Factors” ALL QUESTIONS MUST BE A... TTEMPTED BEFORE THE SEMINAR. Katz Murphy (1992) A very old paper, but a classic study in this area of labour economics. Economists were very quick to spot the tide of rising inequality (still in the news headlines today) and offered a distinct explanation: skill biased technological change (SBTC). Their key tool for this analysis is the basic demand and supply framework. This paper discusses the role of demand (for skill) and supply (of skill, i.e. college graduates) in changes in the wage structure over the 1970s and 1980s. Although the SBTC hypothesis is not uncontroversial, the issues about supply and demand raised in this paper are still very much relevant today. This paper does a fantastic job of marshalling data and evidence to test the main hypotheses. This paper is quite hard going in places. You can ignore much of this more dense material, and should concentrate your energies on the issues discussed below.  Read the Introduction.  What happened to the wage structure in the US through the 1980s?2  What are the potential causes of these changes?  What time period will KM analyse?  Read section II.  What kind of data do KM use? What is their key outcome variable?  Read section III.  What does the evidence in Figures I and II tell us?3  Read sections IVB + IVC  What do KM have to say about the role of factor supplies and demands? Can we explain changes in the wage structure by assuming a stable demand function and using relative changes in the supply of graduates? What’s going on in Figure III?  Read pp 54-57; Read parts of section VI: the key estimation / regression equation is (19) on p.69. Interpret the estimates from this equation. What does it tell us? What does Figure IV tell us?  Write your conclusion. [Show More]

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