February 2020
Abstract
How does incremental improvement in the quality of capital contribute to widening wage inequality? We study the wage effects of imported machinery in Hungary between 1988 and 2004 through the lens of a model. In our model, imported machines are faster and more reliable than old ones. Both characteristics complement worker skill: (i) better workers will be assigned to imported machines, where (ii) their productivity and wage will increase and (iii) their wages will become more unequal. We confirm these predictions in the data. Our estimates imply that about half of the increase in wage inequality among machine operators can be attributed to the increased availability of imported machines. The policy implications of our mechanism are different from the conventional view that certain skills will become obsolete with new technologies.