Wage Divergence and Asymmetries in Unemployment in a Model with Biased Technical Change

In this article we present a model with two levels of skills and two classes of goods, one produced with a technology requiring high skills, the other produced with a technology that can be operated by both low and high skilled workers. In this model skill biased technical change causes a drop in the demand for low skilled workers. The model, however, generates two distinct labour market regimes. In one regime we show skill biased technical change causes wage divergence between skilled and unskilled workers. In the alternative regime a reallocation of labour prevents such wage responses. Introducing labour market institutions through a bargaining process endogenises labour supply. This leads to three possible labour market regimes and shows that skill biased technical change always causes wage divergence but wage responses are moderated by higher unemployment of low skilled workers.