The skill premium fell substantially in the first part of the 20th century, and then rose at the end of the century. I argue that these changes are connected to the organization of production. When production is organized into large plants, jobs become routinized, favoring less skilled workers. Building on the notion that numerically controlled machines made capital more “flexible” at the end of the century, the model allows for changes in the ability of capital to do a wide variety of tasks. When calibrated to data on the distribution of plant sizes, the model can account for between half and two-thirds of the movement in the skill premium over the century. It is also in accord with a variety of industry level evidence.
Published in: _International Economic Review_ (Vol. 46, No. 3, August 2005, pp. 935-955) https://doi.org/10.1111/j.1468-2354.2005.00352.x.