Skill-biased Technological Change in Small Open Economies

Recent decades have seen rising earnings inequality combined with changing employment structure, for which skill-biased technological change (SBTC) has been proposed as a driving force. We reexamine the effects of SBTC in a small innovative open economy context where both factor and output markets are integrated to world markets. We demonstrate that market openness further exacerbates the SBTC effects on both wage inequality and employment chances for unskilled workers, because openness essentially boosts the marginal productivity of skilled workers more and fosters incentives to conduct R&D investment, holding other things constant. Using micro data about a small open economy that experienced rising openness and R&D activities over the sample period of 1998-2008, we obtain evidence that the wages and employment of skilled labor have increased more over time in the high-tech and trade industries that are more likely to be affected by SBTC. Some implications are discussed.