Effects of Technology and Education on Wage Inequality

Jonghyuck Park
Abstract
In this study, the effect of technological development on wage inequality is
examined. Many researches on the effects have been conducted. However, the
gravity and complexity of its controversy is growing. It is widely accepted that
wage inequality has been increased as a result of computerization. Providing
equal opportunity of education had been suggested as a way to diminish these
effects of technology. This paper uses quantitative analysis on the dataset of
investment on Information and Communication Technology (ICT) and public
expenditure on educational institutions provided by OECDs 2009 report to
investigate the impact of education on wage disparity. Contrary to previous
researches, this paper concludes that technological investment has a negative
relation with inequality. The merit of this paper is providing the Information and
Communication Technology Driven by Education (ICTDE) as a measurement to
estimate income inequality.

1. Introduction
A lot of researches have asserted their views about the effect of technological progresses on labor
market. Karl Marx insisted that the developments in manufacturing technology would lead to a
decline in wages in proportion to the decreasing demand for labor. In contrast, Joseph Schumpeter

Continuing this legacy, plentiful attempts to explain the influence of technology on economy exist
(Choi, 2009).
The well-recognized theory of compensation explains that technological innovation causes
unemployment in the short-run as it substitutes for human force only to expand employment
opportunities in the long term. New industries and markets will be created from technology-inspired
innovation. For example, textile machinery replaced craftsmen, but mass production enabled by
those machineries reduced the price of textile goods. This had led naturally to the expansion of
market, leading to a great expansion in the related job markets such as distributing, managing and
selling them. Globalization theory, which develops compensation theory further, has tried to analyze
that the effects according to localities. Since technological development expands the range of global
economy, technology-savvy industrialized economies are the greatest beneficiaries. Naturally, the
importers of new technology face drastic decline in job market (Ruttan, 2001). Both perspectives
are valuable to examine the decline and increase in the size of total labor market, but are limited in

Effects of Technology and Education on Wage Inequality

claimed that wage would increase as the profit growth caused by saved costs in manufacturing.

explaining the dispersion of wage distribution. The number of jobs and the wage inequality could
increase concurrently.
This intrigued researches on the relation between distribution of wealth and technological
development. 1960s marked such beginning and emphasized on the finding of technologys
contribution to shortening the hours of labor, which was soon challenged. Technological change is
encouraged by both labor-saving and capital-saving factors. Rosenberg(1976) analyzed the 19th
century industries in England and concluded that textile industry could save its labor while the
chemical industry saved its capital. Studies following Rosenberg also found country or industrybased divided results of technological innovation.
Recent studies are focused on industry-based analysis of technological development. Most popular
issue today is unsurprisingly that of information technology and especially its relation to
employment. IT has been the leading contributor to negative effect on employment as its impact is
comprehensive to all industries that involved human labor (Autor, et al., 1998). Compensation
theory anticipates such technological advancement will increase the demand of human labor which
is required to develop and implement the newly created systems. When unemployment decreases,
inequality follows its downward trend. Technological advancement and specially IT development
are therefore expected to decrease inequality in the near or far future.
Nonetheless, these theoretic anticipation is absent of real-life examples. Hur, et al. (2001) found
ICTs contribution to inequality along with Jaumotte. et al. (2008) who goes on to further augment
the negative externality of technological advancement by analyzing the correlation between
investment on ICT and wage inequality. Adding to the revelation is the discovery that the investment
on ICT has more detrimental impact on wage disparity than the alleged impact of trade and financial

Technological advancement will create wage inequality between high-skilled laborers and lowskilled laborers based on their respective capacity to utilize more up-to-date technology. Job
retraining will have little effect on encouraging the transition from low-skilled laborers to highskilled laborers. Low-skilled laborers lack the experience of professional training and the time they
spent on their profession will limit their entry to a new market due to their age. Temporary and
provisional job training will not assist in re-employment.
In General, technology and science have value neutrality. Therefore it is logical to search for other
element that affects technology to lead inequality. One of such inquiry is to find the answer in
educations role in the relation between technology and inequality. Technology gauges the wage of
laborers by the level of their capacity to utilize recent technology. If education can put weight on the
possibility of low-skilled workers becoming their counterpart, wage disparity will be alleviated. In
spite of this, Wallerstein (1999) insisted that education can become de facto trigger to widen the
wage gap as advanced education is available to restricted class of workers.

Effects of Technology and Education on Wage Inequality

globalization.

Due to the divided and multiplying opinions, it is debatable to conclude that there is a direct
relation between technological advancement and income disparity. The relation between the level
of education and income disparity is not free from such controversy. Therefore, several hypotheses
in accordance with the previous researches are set and investigated.

Hypothesis 1: Technological development would stimulate the gap between the

two classes of high educated and high-skilled laborers and low-skilled laborers
was the demand for their respective labor is rewarded with great difference based
on their capacity to apply technological skills and knowledge.

Hypothesis 2: In this manner, technological development would increase the

level of inequality, but wage inequality would diminish in the countries which
offer opportunities to be educated for all.

Hypothesis 3: Educational inequality decides the direction of the income

inequality (whether it deepens or weakens income inequality), and technological
inequality would determine the magnitude of the changes in wage inequality. For
example, higher level of technological advance would increase the wage
inequality severely when the education gap is wide, but would decrease the
income disparity considerably when the inequality of education is narrow.

Quantitative analysis is used to test the hypothesis of this study. The result of quantitative analysis
should not deceive the readers of its apparent objectivity as it is highly dependent on data. It is in
this light this paper examines dataset used by Jaumotte. et al (2008). The only amendment to the
dataset is the addition of new data on investment in Information and Communication Technology
(ICT) and public expenditure on educational institutions1. Such addition enables a more accurate
and recent review of the topic. Particularly, the public expenditure on educational institutions
illustrates well who the authority of education is and how accessible education is to the public. Table
1 lists down the details of examined dataset including fiscal variables on national productivity,
education and technology. These figures are collected from 21 OECD member states of a period
from 1980 to 2006. Most importantly, Gini index for wage distribution is considered as a measure
for wage inequality.

OECD Factbook (2009)

Effects of Technology and Education on Wage Inequality

2. Data

Table 1 : Abbreviation used on Dataset

Countries

Period

Australia, Austria, Belgium, Canada, Denmark, Finland, France,

Germany, Greece, Ireland, Italy, Japan, Korea, Netherlands,
New Zealand, Portugal, Spain, Sweden, Switzerland,
United Kingdom, United States (Total 21 Countries)
1980~2006 (For 27 years)

Variables (11)
Log Gini
GDP

Explanation
Natural logarithm of Gini index for wage distribution, Dependent Variable
Nominal GDP in U.S. dollars, USD

OPEN

Trade openness, % GDP

TARIFF

100 minus tariff rate, %

FINOPEN
TLIAB

Financial openness, % GDP

Total Liabilities, % GDP

KAOPEN

Capital account openness index

LOG PES

Natural logarithm of Share of Public Expenditure on Education Institutes

LH15
LOG ICT
ICTDE

Population share with at least a secondary education, %

Natural logarithm of ICT shares in total capital stock
Information and Communication Technology Investment Driven by Education

This paper is distinct from previous attempts in studying the relation between technology and wage
inequality as it utilizes Information and Communication Technology Driven by Education (ICTDE)

are exempt as a direct cause of wage inequality. What determines the fate of wage inequality under
the influence of technology is equality in education. Equality in education in this paper is measured
by the rate of public expenditure on educational institutions. The rate of public expenditure lower
than 50% suggests widening income disparity. This naturally anticipates that the rate above 50%
will narrow down income disparity. The formula below calculates ICTDE by multiplying the
investment on ICT of a particular year.
ICTDE = 2 ICT (PES 0.5)

(1)

To recapitulate, ICTDE is driven by multiplying the product of doubled investment on ICT shares
in stock market (2ICT) with the public expenditure on educational institutions(PES) subtracted
by 0.5 (a number between -1 and 1). Figure 1 shows the negative relation between ICTDE and log
value of Gini index for 21 countries from 1980 to 2006. It is expected that ICTDE is a good
explanatory variable for explaining wage inequalities.

Effects of Technology and Education on Wage Inequality

as a variable. As mentioned in the third hypothesis, technology and its value-neutral characteristic

Figure 1. Relation between ICTDE and LOG GINI

3. Empirical Analysis
Table 2 demonstrates the result of panel regression models designed for testing the hypotheses
explained in the introduction part. What I found in the first model is that there is no significant
evidence that technological development causes wage inequality. On contrary to the first hypothesis,
the regression coefficient for log value of ICT share is less than 0 and is statistically significant at
the 0.1 level in Model 1.
Interestingly, the model shows the positive relation between tariff rate and wage inequality;
countries which have lesser tariff are expected to have more equalities in labor market. In addition,

Secondly, the share of public expenditure on educational institution and the percentage of
advanced education attained have no significant contribution on the wage inequality p-values for
both factors are 0.539 and 0.251 respectively - in the second model. It was expected that the
opportunity to be educated relaxes wage inequality, but proved not to be true like the results from
Wallerstein (1999) and Jaumotte. et al. (2008). Similar to the first regression model, countries which
have higher GDP and lower ICT shares have greater level of wage inequality. Contrary to the
previous regression model, tariff loses its significant effect on the inequality of wages.
A key finding from Model 1 and 2 is that the share of ICT and wage inequality show negative
relation; inequality decreases as technology develops on contrary to the previous research. Whereas
Jaumotte. et al. (2008) who conducted their study in scope of 51 countries, composed of 20 advanced
economies and 31 developing economies, the most developed 21 member states in the OECD are
concerned in this study. It is concluded that ICT shares in total stock market have wage inequality
reduction effect in the developed countries.

Effects of Technology and Education on Wage Inequality

GDP shows positive relation with wage inequality.

Table 2 : Income Inequality Panel Regression2

(dependent variable: natural log value of Gini index)
Model 1

Model 2

Model 3

5.0941
0.000**

5.0162
0.000**

4.1415
0.000 **

GDP

0.00004303
0.000**

0.00003492
0.011**

0.00001094
0.278

Trade Openness

-0.0001811
0.758

0.0002892
0.718

0.0005731
0.303

Tariff
(100 tariff rate)

-0.016791
0.016**

-0.015600
0.118

-0.008232
0.305

Financial Openness

-0.0000682
0.889

0.0002920
0.585

0.0004993
0.249

Total Liabilities

0.0006118
0.527

-0.000297
0.773

-0.0007970
0.343

0.00813
0.502

-0.02310
0.485

0.03805
0.029**

-0.06523
0.100*

-0.14248
0.026**

Constant
Macro Economy

Index of Capital Openness

Control

Log(Share of Public Expenditure

on Education Institutes)

0.05265
0.539

Percentage of higher school

attained in the total populations

0.002465
0.251

Information and Communication

Technology Driven by Education

-0.008765
0.000 **

Observations3

105

57

70

R-Squared

.282

.348

.446

Adjusted R-Squared

.230

.223

0.383

Hur, et al. (2001), however, assert that the investment on ICT which had increased since 1996
caused the wage inequality in South Korea. As shown in Figure 2, there was remarkable change in
the amount of ICT investment in 1996, and Gini index for income distribution had increased from
that time. However, their explanation seems inadequate because of nation-wide economic
restructuring and layoffs in that period after 1997 Asian Financial Crisis.

Statistical analysis was conducted by Minitab 15.1. Upper figures in each cell are the regression coefficients and the lower figures are
the p-value for each regression coefficient. * denotes when p-value is less than 0.1, and ** means that p-value is less than 0.05.
3
There are differences in the number of observations between models due to missing values.

Effects of Technology and Education on Wage Inequality

Log(ICT Share)

Figure 2. Relations between Log-valued Gini and Log-valued ICT Shares in Korea:
before and after the Asian Financial Crisis in 1997
Finally, in model 3, as expected, ICTDE shows significant negative relation with the wage
inequality. In other words, technological investment is helpful for diminishing the wage inequality
when the shares for public expenditure on educational institution are greater than half, and vice versa.
It is concluded that the increase in public expenditure on education institution promotes the equal

4. Conclusion
In this study, the effects of education and technology on wage inequality are examined. According
to Autor, et al. (1998), labor market changes induced by technological development increased wage
inequality from 1940 to 1996. On the contrary to this, during the period from 1980 to 2006, there is
no evidence that the technological development has intensified wage inequality; rather, ICT shares
in total capital stock have a significant negative relation with income inequality. It is conjectured
that investments on ICT in those countries are neither innovative nor effective to change the labor
market.
Several education factors have shown that they are not directly related to wage inequality, in
accordance with the claims from Wallerstein (1999) and Jaumotte, et al. (2008). In this paper, it is
proven that educational equality decides the direction of wage inequality and technological
development affects the magnitude of it by adopting the new variable, ICTDE. It implies that public

Effects of Technology and Education on Wage Inequality

opportunities in education, ergo diminishing wage inequality.

policy, in its designs, should examine diverse constituents and conditions existing under its
socioeconomic boundaries.
Political variables, known for strong effects on the level of inequality, such as electoral systems,
ideology of governing party, and so forth, are no concerns of this paper. Finding the most influential
factor on wage inequality that will provide constructive direction to reaching welfare state inspires
further study.

Acknowledgement
This paper was written in Korean as a term paper for the class that I took in the fall semester of 2009
(Colloquium on Specific Topics Comparative Politics: Graduate Course). It is translated and abridged for
submitting to CEU as a writing example.

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Effects of Technology and Education on Wage Inequality

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