Week2_Bresnahan et al. (2002)_Aaron

Information technology, workplace organization and the demand for skilled labor: firm-level evidence

A significant shift in labor demand towards skilled workers in the late 20^th century have been attributed to skill-biased technical changes (SBTC). Quantitative research has made it clear the important role of information technology in SBTC and its direct correlation with skill at the worker, firm and industry level.

Rather than only investing IT for quality improvement and efficiency gains, successful firms reveal preferences to a combination of three related innovation, a) increased use of IT, b) changes in organization practices and c) changes in products and services. Bresnahan et al. (2002) extend the SBTC theory through the rational that decline in price of IT will increase firms’ use of the complementary system of abovementioned three innovation, thereby increasing the relative demand for skilled labor.

Their rational is supported by evidence from archive data, survey and interviews with managers from 300 large U.S firms. Bresnahan and his collegues examine the correlations across firms in the use of hypothesized complements, test a short-run conditional input or technology choice equations and analyze simple production functions. Alternative explanations, such as managerial fad, demand shocks and aggregation error, are shown to be inconsistent with all the empirical results, making their hypothesized rational more reliable and validated.

Their analysis has implications for understanding SBTC. First, it provides new firm-level evidence to show that IT is a source of increased demand for skilled labor and rising wage inequality. Second, it identifies a set of mechanisms by which labor demand is influenced through organizational redesign that calls for complementary investment in IT, work organization and product innovation.