Skilled-Unskilled Wage / Employment Disparity - A CGE Simulation Analysis

From the 1970s to the beginning of the 1990s, a number of OECD countries, particularly the US and the UK, have witnessed a widening disparity in the skilled /--unskilled wage differential and / or the unemployment rates. Many factors have been proposed for explaining this disparity, ranging from skill-biased demand shifts to skill-biased technical progress. This paper takes a general equilibrium approach by employing a multi-sector CGE model of Scotland to integrate various factors in a single coherent modelling framework. The modelling framework combines conventional forms of exogenous technical progress in the production process with alternative labour market settings. The paper illustrates that the skill impact of exogenous technical shocks depends on the form of technical progress, the origin of the shock, as well as labour market factors, particularly the wage setting behaviour--and asymmetric skill mobility. The CGE simulation results do lend some reserved support to the skill biased technological change argument.