Skill-biassed change, unemployment and wage inequality

The analytical frameworks used for thinking about the determinants of the level of unemployment are not well-suited to thinking about the effects of skill-biassed technical change. In this paper, we argue for making relative wages as an argument of the labour supply function (or wage curve) in order to explain the observed patterns of wage inequality and unemployment. We argue that if this is done, we would expect labour market institutions to be much less important than is generally assumed in determining labour market outcomes in the longer-run and that policies towards education are likely to be much more important. We illustrate this by arguing that the British public education system effectively rations access to education and prevents market incentives from working. (C) 1997 Elsevier Science B.V.