Technology-skill complementarity in a globalized world

Résumé

Is there a skill-biased component of firm productivity? How does innovation affect this, and the firm’s demand for skill? I use plausibly exogenous variation from a policy change to estimate the reduced form effect of innovation on skill demand, using rich data on Norwegian firms and workers. I find that innovation does increase firms’ demand for skill. To quantify the extent to which firm productivity is skill-biased, I propose a novel and flexible estimation strategy based on a simple theoretical framework. I find strong support for the presence of a skill-biased component of productivity, which matters for aggregate outcomes: the estimated within-firm skill-biased productivity growth can account for the majority of the observed rise in the skill premium in Norway over the sample period. The results suggest that innovating firms have higher levels and growth rates of skill-augmenting productivity. The structural estimates of the impact of innovation on skill demand can account for the lion’s share of the reduced form effect. Combined, these findings have important implications for understanding the link between innovation and inequality, for unbiased productivity estimation, and for policy.