This article examines the determinants of changes in the U.S. wage structure from 1976 to 2000. Our main empirical observation is that changes in both the level of wages and the returns to skill over this period were primarily driven by changes in the ratio of human capital to physical capital. We show that this pattern conforms extremely well to a simple model of technological adoption following a major change in technological opportunities. In contrast, we do not find much empirical support for the view that ongoing (factor‐augmenting) skill‐biased technological progress has been an important driving force over this period.

This paper argues that several of the poor labor market outcomes observed in the Great Recession can be traced back to a change in the demand pattern for skilled workers that started with the tech bust of 2000. In particular, we show that around the year 2000, the demand for cognitive tasks underwent a reversal. In response, high-skilled workers moved down the occupational ladder and increasingly displaced lower-educated workers in less skill-intensive jobs. While these effects were present before the financial crisis of 2008, they became more obvious after jobs associated with the housing bubble disappeared.