Technology diffusion and its effects on social inequalities

•We research the supply side effects of a skill-biased technology diffusion.•We build a DGEM with diffusion of a SBTC, education and leisure–labor decisions.•Unskilled workers allocate their time between production and school.•Our model explains both the skill-premium and skills supply evolution.•The skilled and unskilled labor supply change over the technology diffusion cycle.

We develop a dynamic general-equilibrium framework in which growth is driven by skill-biased technology diffusion. The model incorporates leisure–labor decisions and human capital accumulation through education. We are able to reproduce the trends in income inequality and labor and skills supplies observed in the United States between 1969 and 1996. The paper also provides an explanation for why more individuals invest in human capital when the investment premium is going down, and why the skill-premium goes up when the skills supply is increasing.