Overhead Labour and Skill-Biased Technological Change: The Role of Product Diversification

Abstract

Most of the literature on skill-biased technological change views both skilled and unskilled labour as variable inputs. In contrast, this study focuses on the role of skilled workers comprising overhead labour in the recent increase in skill demand. The first chapter focuses on the aggregate shift in skill demand, while succeeding chapters focus on the heterogeneity of this demand across firms. In the first chapter, I argue that the transition from Ford-style mass production toward mass customization in the 1980s may be responsible for the increase in skill demand since introducing new goods requires fixed labour input, which is biased towards skilled workers. I present a dynamic general equilibrium model, which explains both the rapid growth in skill demand since the 1980s and the recent puzzling slowdown since the late 1990s. However, as the ratio of fixed to variable inputs cannot increase indefinfinitely, my model also predicts that the growth in skill demand will slow down in the long run. In the second chapter, using UK manufacturing data, I show that the employment share of non-production workers is positively correlated with firm size but negatively correlated with the latter over time. I argue that this serves as evidence for the existence of (partially) fixed skilled labour, with the premise being that firms with larger fixed input are both larger in size and have a higher share of non-production workers. However, short-run output expansion only increases variable labour, and therefore it decreases the employment share of non-production workers. In the third chapter, I present a second piece of evidence in support of the main thesis of this dissertation. I show that exiting firms as well as entering firms have a higher share of non-production workers in UK manufacturing industries. This phenomenon is rather puzzling as exiting firms have lower labour productivity, but nevertheless the finding presents itself as being consistent with the contention of this study that skilled workers constitute an overhead labour input.