Skill-biased technology imports, improved education access and rising wage inequality in a developing country

As a response to skill-biased technological change (SBTC), expanded education access is regarded by many as an appropriate way to reduce wage inequality, so developing countries are engaged in a race between education and SBTC. In this model, developing countries (the South) adopt technologies by purchasing licences from technology leaders (the North). If skilled and unskilled labour are perfect substitutes, we show tehnological change is skill-biased in the South simply because it is in the North, resulting in permanently rising wage inequality in the South. We model expanded educational access as producing relatively educated new cohorts of labour market entrants. This makes the market for skill-biased technologies more attractive, which generates accelerated wage inequality. Allowing for skilled and unskilled labour to be imperfect substitutes shows the elasticity of substitution () would have to be high for a rise in skill supply to raise wage inequality. The threshold of required is higher than for developed countries and higher than for Northern skill-biased technological change to do so. Existing estimates of suggest greater skill supply is unlikely to increase wage inequality and it is more likely that global technology patterns will. 1