The Long-Lasting Effect of Technological Change on the Careers of Young Workers: Evidence from Changes of Mandatory Training Regulations

According to standard human capital theory, incumbent workers are more productive than similarly educated fresh graduates, simply because incumbent workers have relatively more work experience. However, a number of empirical studies suggest that skill-biased technological change relates to a steadily increasing productivity of fresh graduates (e.g. Card and Lemieux, 2001 and Bowlus and Robinson, 2014).  Fresh graduates commonly acquire the newest knowledge in school, and they can make large investments to become proficient in the use of modern technologies. In contrast, incumbent workers, who are involved in the production process, must incur substantial opportunity costs to accumulate the most recent knowledge. Thus if groundbreaking new technologies substantially change the demand for skills, incumbent workers may have a comparative disadvantage in the use of recent technology relative to similarly educated fresh graduates. Particularly, younger incumbent workers with little work experience, who often must compete with fresh graduates for jobs and promotions, may incur substantial and long-lasting adjustment costs, because firms have incentives to replace them with workers who have a comparative advantage in the use of modern technologies (e.g. Acemoglu and Autor, 2011).

Therefore, this paper investigates how the increasing labor supply of fresh graduates with modern IT (information technology) skills impacts the careers of young incumbent workers during periods of fundamental technological change. To identify the causal effect within a difference-in-difference framework, we exploit a regulatory change in a mandatory German apprenticeship training regulation that obligated fresh graduates of a large manufacturing occupation to acquire modern IT skills. The paper shows that fresh graduates with modern IT skills crowd incumbent workers out of their jobs and occupations. As a result, even young incumbent workers, who lack modern IT skills, experience long-lasting earnings reductions. The earnings effects prevail for more than 20 years and incumbent workers are more likely to leave their occupation or to become unemployed.