Unraveling the Skill Premium

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractFor the US the supply and wages of skilled labor relative to those of unskilled labor have grown over the postwar period. The literature has tended to explain this through "skill-biased technical change". Empirical work has concentrated around two variants:(1) Capital-skill complementarity, and (2) Skill-augmenting technical change. Our purpose is to nest and discriminate between these two explanations. We do so in the framework of 2-and 3-level CES production function where factors are disaggregated into skilled and unskilled labor, and the capital stock into structures and equipment capital. Using a 5-equation system approach and several nesting alternatives, we retrieve estimates of the elasticities of substitution and factor augmenting technical changes. Non-technical summaryFor the US and many other countries, the relative supply of skilled labor has grown markedly over the post-war period. Despite this expansion of supply, there has a large increase in the real wages of skilled labor relative to unskilled labor. This wedge is what we call the skill premium. How might we explain this phenomenon? The literature has tended to explain this through "skill-biased technical change". In particular, empirical work has concentrated around two variants: (1) Capital-skill complementarity, and (2) Skill-augmenting technical change. This does not preclude other explanations (off shorting, de-unionization etc.). But it does tend to view those alternative explanations through the lens of these two channels. Taking these two channels, our purpose is essentially to nest and discriminate between these two explanations. We do so in the framework of 2-and 3-level CES production function where input factors of production are disaggregated into finer components. For labor this disaggregation is into skilled and unskilled labor, and, for the capital stock, into structures and equipment capital. We derive the five non-linear equation system with cross-equation constraints. We estimate them under different assumptions on how the four factors and technical change augmenting them are combined in three-and two-level CES production functions. We retrieve estimates of the elasticities of substitution and factor augmenting technical changes. Our framework allows us to decompose in each case the level and growth rate of the skill premium into three separate channels: (1) capital-skill complementarity, (2) technical change channels as well as (3) ...

What Determines the Elasticity of Substitution Between Capital and Labor? A Literature Review

“…In addition, see Krusell et al . (2000) and McAdam and Willman (2018) for a discussion of different nesting structures for low‐ and high‐skilled labor together with structures and equipment capital.…”

Directed Structural Change

“…18. There is a large literature that demonstrates the importance of skill-biased technical change; see, for example, Acemoglu and Autor (2011) and McAdam and Willman (2017).…”

Skill substitutability, trade with China and college wage premium in Korea

“…We estimated an extended modification of Specification ( 6) that includes either R&D stock-to-GDP ratio or knowledge-based capital-to-GDP. But the estimates on R&D capital variable 14 We have tried to estimate a system of equations including the CES production function and its first-order conditions simultaneously (McAdam & Willman, 2018). The CES production function that we would like to estimate is as follows:…”

“…According to Krusell et al (2000), the skill complementarity condition is satisfied when 𝐴𝐴 𝐴𝐴 𝐴 𝐴𝐴 . However, in order to obtain the meaningful estimates for the substitution elasticities, estimating a system of equations as in McAdam and Willman (2018) requires more detailed data for the (equipment) capital stock and factor prices. 15 According to Bank of Korea (2020), intellectual property product can be sub-divided into research and development R&D stock and other intellectual property products including computer software and databases, entertainment, literary and artistic originals and mineral exploration.…”