Can Theories of Skill-Biased Technological Change Explain the Evolution of Wage Inequality in Finland since 1970?

Abstract: Wage inequality has increased in many OECD countries since the 1970s. Many have explained this development in terms of skill-biased technological change. According to theories of skill-biased technological change, wage inequality is the result of a technology-induced increase in the demand for skills which has not been met by equal increases in the supply of skills. This paper explores the relationship between supply and demand for skills in Finland since 1970. The main finding is that changes in the supply of education can explain the bulk of changes in the skill premium and that technological change provides added explanatory power in periods when the simple supply-based framework falls short. The results also suggest an increasing within-group inequality of workers with equivalent educational levels. The cause of the within-group inequality is less clear, but both technological and institutional factors are likely to play roles in this development.