One of the explanations for growing income inequality, and high unemployment, is that the labor market has been altered by the advance in technology. In this view, technology complements labor and it increases the demand for skilled labor faster than the education system can supply skilled labor. The shortage of skilled labor leads to a skill premium that increases the wage gap between skilled and unskilled labor. The solution to this problem is to increase the supply of skilled workers by expanding education.
This article looks at the evidence for the skill premium hypothesis and provides an alternative hypothesis about the new machine age and its impact on wages and employment. It argues that capital is a substitute for skilled labor, rather than a complement, and that most Western nations do not have a shortage of skilled labor. Therefore, rising income inequality cannot be explained by a skill premium that results from an imbalance between the demand for skilled labor and the supply.
If there were a shortage of skilled labor in Europe one would expect that wages for skilled labor would be increasing. In fact, the skill premium has been declining in Europe. This suggests that the supply of skilled labor is growing faster than the demand for skilled labor. Moreover, with the exception of Germany, the education system has been increasing the supply of skilled labor. The unemployment rate for skilled labor in the UK has doubled between 2000 and 2012 and it has tripled in Spain and Italy. The unemployment rate for skilled labor in Germany has not increased because its education system has not expanded its output of skilled labor.
Prior to the 1980's the labor share of global income was fairly constant at 70%, and 30% of global income went to capital. The share of income going to labor has been falling since the 1980"s. Labor's share of income has dropped to 58%. That is hard to explain by asserting a shortage of skilled labor. One study shows that half of the decline in labor's share of income due to the substitution of capital for skilled labor. We may have an over supply of highly educated workers. This explanation is supported by the rising numbers of recent college graduates who are unemployed or under employed. Many college graduates are now taking jobs that were previously filled by less educated workers. In the US, there was a skill premium during a period of slower growth in skill development by the education system. The skill premium in the US has been flat since 1999 as the education system increased the number of college graduates.
It would appear that the "New Machine Age" has affected the labor market in a serious manner. However, the solution to the problems associated with the advance of technology does not suggest that they can be resolved by producing a larger number of college graduates. Access to higher education is more of an equal opportunity problem than anything else. College graduates do have better employment opportunities than non-graduates; the rising costs of higher education in the US, along with a decrease in state funding for higher education, has exacerbated the equal opportunity problem in the US. It has also increased the debt burden on middle class families whose wages have not kept pace with the increase in the net cost of higher education.
Unfortunately, the skill premium explanation for rising income inequality is more consistent with neo-liberal economic theory which assumes that we have a meritocracy. The market is rewarding merit and it would distort the market if we tried to change it. The solution is to produce more merit. It is more convenient to shift the debate to problems in the merit production system than it is to examine structural and institutional changes that are reducing labor's share of global income.