Non-Technical Summary

In many industrialized countries, high-skill and low-skill labor incomes have been diverging strongly. In other countries, unemployment rates among low-skill individuals have been increasing dramatically. While there is virtually unambiguous agreement that demand for high-skilled labor has been increasing in most, if not all industrialized countries, there is no agreement on the causes of the demand surge. This survey discusses potential explanations for these developments and the contribution that TSER-funded research in the ”Innovation, R&D and Productivity ” network has made in this line of research. I also discuss the view that labor market flexibility is instrumental in directing shocks from new technologies, trade or capital market liberalization towards either unemployment or wages. The survey finally turns to open research questions and discusses long-term policy responses to the recent developments. 1 Major Trends in Skills and Wages Over the last decades, wage, skill and employment patterns have been changing dramatically in many industrialized nations.1 In ome countries, there has been a drastic change in relative employment- employment of skilled workers has been rising, and the share of unskilled among the employed has decreased drastically. In countries like the U.K. and the U.S., these change