The diffusion of computers and the distribution of wages

When the costs are decreasing workers adopt technology at the point where the costs equal the increased productivity. Output per worker increases immediately, while productivity benefits increase only gradually if costs continue to fall. As a result, workers in computer-adopting labor market groups experience an immediate fall in wages due to increased supply. On the other hand, adopting workers experience wage increases with some delay. This model explains why increased computer use does not immediately lead to higher wage inequality. More specifically, the results of the model are shown to be consistent with the question why within-group wage inequality among skilled workers as a result of computer technology adoption in the united states increased in the 1970s, while between-group wage inequality and within-group wage inequality among the unskilled did not start to increase until the 1980s. The model also predicts that the more compressed german wage structure leads to a lagged diffusion of computer technology along with smaller changes in wage inequality. Our empirical analysis suggests that this is consistent with the actual developments in germany since the 1980s. Finally, the theoretical predictions seem to be of the right magnitude to explain the empirical quantities observed in the data.