The skill premium and the ‘Great Divergence’

This article analyses the long-term development of the skill premium in western Europe in a global perspective, on the basis of data on wages of skilled and unskilled construction workers in more than a dozen European countries and regions, and in a number of non-European countries such as India, China, Japan, Russia, Korea and Indonesia. It shows that already in the late medieval period the skill premium in western Europe had fallen sharply and became, from the fifteenth century onwards, much lower than in most other parts of the world economy. Only in southern China, and perhaps also in nineteenth-century Japan, did the skill premium fall to an equally low level. The explanation for these global patterns focuses on factor proportions, the quality of institutions and demand-related factors. Moreover, it is argued that the skill premium measured in this way is also a predictor of long-term economic performance.