Capital–Skill Complementarity: Does Capital Composition Matter?

We estimate the effect of capital composition on the size of capital–skill complementarity and the skill wage premium. Disaggregating the capital stock into different types according to technological content, we find that: capital is more of a q‐complement to skilled labor than to unskilled labor; the higher the technological component of capital, the larger the size of the relative q‐complementarity between capital and skilled labor; and replacing non‐technological with technological capital might increase the skill wage premium by about 9 percent. Our results highlight that changes in capital composition matter for understanding changes in the skill wage premium.     

Investment-specific technological change, skill accumulation, and wage inequality

Wage inequality between education groups in the United States has increased substantially since the early 1980s. The relative number of college-educated workers has also increased dramatically in the postwar period. This paper presents a unified framework where the dynamics of both skill accumulation and wage inequality arise as an equilibrium outcome driven by measured investment-specific technological change. Working through equipment–skill complementarity and endogenous skill accumulation, the model does well in capturing the steady growth in the relative quantity of skilled labor during the postwar period and the substantial rise in wage inequality after the early 1980s. Based on the calibrated model, we examine the quantitative effects of some hypothetical tax-policy reforms on skill accumulation, wage inequality, and welfare.     

Free trade, factor returns, and factor accumulation

A model of development is studied in which physical capital and unskilled labor are good substitutes, and skilled labor is complementary to the resulting aggregate. Growth in a closed economy is compared with two open regimes. Inflows of physical capital only reduce the interest rate and raise both wage rates. The skilled wage rises more sharply, however, increasing the skill premium and accelerating human capital accumulation. Full integration with a larger and more developed neighbor also reduces the interest rate and raises both wage rates, but in this case the skill premium falls and human capital accumulation changes very little.     

Relative Demand for Skills in Swedish Manufacturing: Technology or Trade?

The rate of change in the share of skilled labor has increased steadily over the past 35 years in Swedish manufacturing. A closer inspection of the period after 1970 indicates that, while relative supply changes of skilled labor seem to have been the main driving force behind the growing skill shares in manufacturing industries over the period 1970–85, an acceleration in the relative demand for skills appears to have propelled higher skill shares during the late 1980s and at the beginning of the 1990s. Consistent with such a development is the finding of an increasing degree of complementarity between knowledge capital and skilled labor, and that Swedish manufacturing firms, in recent years, have invested heavily in R&D. There is also some support for the belief that intensified competition from the South has increased the relative demand for skilled labor. However, the impact appears to be small and essentially driven by the textile industry.     

WHY HAVE AGGREGATE SKILLED HOURS BECOME SO CYCLICAL SINCE THE MID‐1980s?*

We document and discuss a dramatic change in the cyclical behavior of aggregate skilled hours since the mid‐1980s. Using CPS data for 1979:1–2003:4, we find that the volatility of skilled hours relative to the volatility of GDP has nearly tripled since 1984. In contrast, the cyclical properties of unskilled hours have remained essentially unchanged. We evaluate whether a simple supply/demand model for skilled and unskilled labor with capital‐skill complementarity in production can help explain this stylized fact. Our model accounts for about 60% of the observed increase in the relative volatility of skilled labor.     

Elasticity of substitution and productivity, capital and skill intensity differences across firms

This paper, instrumented with six theorems, shows that differences between firms in labor productivity, capital intensity and relative demand for skilled labor can be explained by differences in the substitution parameters between capital, skilled and unskilled labor in the presence of skill biased technical change.     

Capital–skill complementarity and the immigration surplus

We build a neoclassical growth model with overlapping dynasties and capital–skill complementarities to evaluate changes in immigration policy. Calibrating the model using US data, we quantify the differential effects of skilled and unskilled immigration on factor returns and on the welfare of different sectors of the population. An influx of high-skilled immigrants lowers the wages of skilled workers, raises the wages of unskilled workers, and because of the relative complementarity between capital and skilled labor, substantially raises the rate of return to native-owned capital. By contrast, an influx of unskilled immigrants produces an opposite effect on wages, and has only a negligible effect on the return to capital. Because of capital–skill complementarity, an increase in the number of skilled immigrants generates an immigration surplus—the overall welfare benefit accruing to the native population—that is approximately ten times larger than the immigration surplus generated by an identical increase in the number of unskilled immigrants. This differential welfare effect is far higher than can be accounted for by the disparity between the productivities of each type of worker.     

产业内贸易对中国技能 工资差距的影响

本文试图考察产业内贸易对技能工资差距的影响,理论分析表明：它随劳动力条件的变化而变化,在劳动力无限供给条件下它取决于技术劳动力的绝对需求,由于产业内贸易必能刺激技术劳动力的绝对需求,因此必然会扩大工资差距。但在劳动力条件转向有限供给后,它又取决于技术劳动力的相对需求,而产业内贸易未必使之扩大,特别是对两类劳动力替代弹性较大的部门来说,可能会使技术劳动力的相对需求下降,并使技能工资差距收缩。本文基于中国33个产业的5年面板数据验证了上述假说。     

What explains skill upgrading in less developed countries?

Although many developing countries have experienced growing income inequality and an increase in the relative demand for skilled workers during the 1980s, the sources of this trend remain a puzzle. This paper examines whether investment and adoption of skill-biased technology have contributed to within-industry skill upgrading in Chilean plants. Using semiparametric and parametric approaches, I investigate whether plant-level measures of capital and investment, the use of imported materials, foreign technical assistance, and patented technology affect the relative demand for skilled workers. I find that some of the increased relative demand for skilled workers can be attributed to capital deepening. However, the relationship between skill upgrading and the three technology measures disappears once I control for unobserved plant characteristics. These results suggest that plant adoption of foreign technology is not associated with plant skill upgrading.     

Foreign Capital,Skill Formation,and Migration of Skilled Workers

We study the interaction between foreign capital inflow and international migration of skilled labor when a small open economy is subject to exogenous shocks. The presence of a skill formation sector is central to our analysis, such that import liberalization and increased foreign capital inflow may lead to increased skill emigration both in absolute terms and as percentage of gross skill formation. Furthermore, a positive product price shock for the sector that uses foreign capital may turn out to be immiserizing. Finally, growth in the agricultural sector can lower the rate of skill formation as well as skill emigration.     

Factor price overshooting with trade liberalization: theory and evidence

This paper develops an intra‐industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non–exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled workers, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant–level data supports the idea of factor price overshooting with trade liberalization.     

Trade,technology, and China's rising skill demand1

China has experienced rising wage inequality due to rising relative demand for skilled labour. In this paper, we use a sample of 1,500 firms to investigate the impact of trade and technology on China's rising skill demand. We find that export expansion had a negative direct effect (Heckscher–Ohlin type) and a positive indirect effect (export‐induced skill‐biased technical change) on skill demand; the net effect was found positive and accounted for 5 percent of rising skill demand of the sample firms. We find that technical change in Chinese firms was on average skill‐neutral, but majority foreign‐owned firms experienced skill‐biased technical progress that accounted for 22 percent of the rising skill demand of the sample firms.     

Equipment Investment and the Relative Demand for Skilled Labor: International Evidence

The effects of equipment investment on relative wages and employment of skilled labor are estimated. The basic hypothesis is that such effects are positive, because of the presence of either equipment–skill complementarity or skill advantage in technology adoption. Using a panel data set for a wide range of countries, the relative wage and relative employment of skilled workers are regressed on lagged investment in machinery and other relevant variables. The results indicate a positive and strong effect of machinery investment on the relative demand for skilled labor, with the relative wage responding much sooner and for a much shorter time than relative employment. Journal of Economic Literature Classification Number: E24.     

Capital-skill complementarity in West German manufacturing

Capital-skill complementarity is tested for two different definitions of skill, using data from 32 West German manufacturing industries from 1975–1990. Using the Kmenta approximation for the CES function provides strong support for complementarity between white collar workers and capital. On the other hand, when “skill” is defined as skilled white collar and blue collar workers, we find essentially no evidence for complementarity. This surprising result suggests that the official classification of skilled production workers does not capture the planning activity most complementary to increasing capital intensity and technological progress.     

Factor‐biased public infrastructure and wage inequality

This paper analyzes how factor‐biased public infrastructure affects the skilled–unskilled wage inequality. In the basic model with a full employment economy, we find that when the weighted dependence of skilled labor and capital in the urban skilled sector on public infrastructure is large enough relatively to that of unskilled labor and capital in the urban unskilled sector, the wage inequality will be expanded. We also discuss labor‐biased and capital‐biased public infrastructure in our framework, and find that the relative dependences of relevant labor or capital on public infrastructure are important determinants of wage inequality. In the extended models, we analyze separately the issue of wage inequality in the economy with unemployment and the totally open capital market, and find the results of the basic model almost still hold.     

Income Distribution and the Demand Constraint

This paper argues thatthe interaction between inequality and the demand patterns forgoods is a potential source of persistent inequality. Incomedistribution, in the presence of non-homothetic preferences,affects the demand for goods and, due to differences in factorintensities across sectors, it alters the return to factors ofproduction and the initial distribution of income. Low inequalityleads to high demand for medium skilled intensive goods, providinga bridge over which low skill dynasties may transition to thehigh-skilled sector in the long run. Under high inequality however,the initial lack of demand for medium skilled labor breachesthis bridge from poverty to prosperity and inequality persists.     

Rural–urban human capital disparity and skilled–unskilled wage inequality in China

This paper builds three‐sector general equilibrium models to investigate how a shrink of rural–urban human capital disparity generates an impact on skilled–unskilled wage inequality in China. In the basic model where the urban skilled sector and the urban unskilled sector have no upstream and downstream linkage, we find that the wage inequality will be narrowed down if the urban skilled sector is more capital intensive than the urban unskilled sector. To capture the characteristic of China's state capitalism, we build an extended model where the urban skilled sector acts as an upstream industry for the urban unskilled sector, and find that the wage inequality will be reduced if the substitution elasticity of unskilled labor and intermediate product in the urban unskilled sector is large enough. When we consider the factual characteristics of the Chinese economy, our models predict that a shrink of rural–urban human capital disparity will be helpful to reduce the skilled–unskilled wage inequality in China.     

Migration,Unemployment, and Skill Downgrading

In this paper, we analyze the labor market impacts of immigration under flexible and rigid labor market regimes. A general equilibrium framework is developed, accounting for skill heterogeneity and labor market frictions, where unemployed medium‐skilled manufacturing workers are downgraded into low‐skilled service jobs, while low‐skilled service workers might end up unemployed. The analytical analysis shows that medium‐skill immigration decreases low‐skilled unemployment under the flexible regime, indicating a complementarity effect, while the rigid regime induces a substitution effect, leading to low‐skilled unemployment. Moreover, it leads to wage polarization. In a numerical analysis, the economic effects of different migration scenarios are quantified.     

The combination of two tragedies: commons and anticommons tragedies

This paper studies the relationship between social conflict and skilled–unskilled wage inequality through the three-sector general equilibrium approach. In the basic model without the urban unskilled minimum wage, we find that when the government enhances the degree of controlling social conflict, the skilled–unskilled wage inequality will be narrowed down (resp. widened) if the urban skilled sector is more capital intensive (resp. labor intensive) than the urban unskilled sector. The extended models address the issue under different economic structures or different types of social conflict. In the extended model with the urban unskilled minimum wage, we find that the skilled–unskilled inequality will be widened when the degree of controlling social conflict is increased. In other extended models, we find that the above obtained results are still robust.     

贸易自由化、有偏的学习效应与发展中国家的工资差异

本文构建了一个模型来研究贸易自由化对熟练劳动力与非熟练劳动力工资差异的影响,从而解释发展中国家工资差异之谜。在贸易自由化之后,发展中国家接触和学习到相对多的与熟练劳动力匹配的技术知识,因此,和生产与非熟练劳动力匹配的技术知识相比,生产与熟练劳动力匹配的技术知识的生产力水平上升相对较多。也就是说,学习效应是有偏的。因为技术知识的生产是熟练劳动力密集型的,所以学习效应会导致对熟练劳动力需求的增加,扩大工资差异。同时,有偏的学习效应会使技术进步更偏向于技能密集型,从而进一步导致对熟练劳动力需求的增加,扩大工资差异。