Skip to main content
×
Home
    • Aa
    • Aa

UNRAVELING THE SKILL PREMIUM

  • Peter McAdam (a1) and Alpo Willman (a2)
Abstract

For the United States, 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” (SBTC). Empirical work has concentrated around two variants: (1) capital-skill complementarity, (2) skill-augmenting technical change. Our purpose is to nest and discriminate between these two explanations. We do so in the framework of multilevel Constant Elasticity of Substitution (CES) production function, where factors are disaggregated into skilled and unskilled labor, and capital into structures and equipment capital. Using a five-equation system approach and several nesting alternatives, we retrieve estimates of the substitution elasticities and technical changes. Our estimations can produce results in line with capital-skill-complementarity hypothesis. However, those results are outperformed where the only source of the widening skill premium has been skill-augmenting technical change. We also show that the different explanations for SBTC have different implications for projected developments of the premium.

Copyright
Corresponding author
Address correspondence to: Peter McAdam, Research Department, European Central Bank, Sonnemannstraße 60314, Frankfurt am Main, Germany; e-mail: peter.mcadam@ecb.europa.eu.
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

D. Acemoglu (2002) Technical change, inequality, and the labor market. Journal of Economic Literature 40 (1), 772.

D. Acemoglu and D.H. Autor (2011) Skills, tasks and technologies. In O. Ashenfelter and D. Card (eds.), Handbook of Labor Economics Vol. 4, Chap. 12, pp. 10431171. Elsevier.

D.H. Autor , L.F. Katz , and M.S. Kearney (2008) Trends in U.S. wage inequality: Revising the revisionists. Review of Economics and Statistics 90 (2), 300323.

D.H. Autor , L.F. Katz , and A.B. Krueger (1998) Computing inequality: Have computers changed the labor market? Quarterly Journal of Economics 113 (4), 11691213.

D. Gollin (2002) Getting income shares right. Journal of Political Economy 110, 458474.

R. Gordon (1990) The Measurement of Durable Goods Prices. Chicago: University of Chicago Press.

Z. Griliches (1969) Capital-skill complementarity. Review of Economics and Statistics 51 (4), 465468.

L. Katz and K. Murphy (1992) Changes in relative wages, 1963–1987: Supply and demand factors. Quarterly Journal of Economics 107, 3578.

R. Klump and O. de La Grandville (2000) Economic growth and the elasticity of substitution: Two theorems and some suggestions. American Economic Review 90 (1), 282291.

R. Klump , P. McAdam , and A. Willman (2007) Factor substitution and factor augmenting technical progress in the US. Review of Economics and Statistics 89 (1), 183192.

R. Klump , P. McAdam , and A. Willman (2012) The normalized CES production function: Theory and empirics. Journal of Economic Surveys 26 (5), 769799.

P. Krusell , L. Ohanian , J.-V. Rios-Rull , and G. Violante (2000) Capital-skill complementarity and inequality. Econometrica 68 (5), 10291053.

M.A. León-Ledesma , P. McAdam , and A. Willman (2010) Identifying the elasticity of substitution with biased technical change. American Economic Review 100 (4), 13301357.

M.A. León-Ledesma , P. McAdam , and A. Willman (2015) Production technology estimates and balanced growth. Oxford Bulletin of Economics and Statistics 77 (1), 4065.

P. McAdam and A. Willman (2013) Medium run redux. Macroeconomic Dynamics 17 (4), 695727.

K. Sato (1967) A two-level constant-elasticity-of-substitution production function. Review of Economic Studies 34 (2), 201218.

J. Tinbergen (1974) Substitution of graduate by other labour. Kyklos 27 (2), 217226.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords:

Type Description Title
PDF
Supplementary Materials

McAdam and Willman supplementary material
McAdam and Willman supplementary material 1

 PDF

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 27 *
Loading metrics...

Abstract views

Total abstract views: 95 *
Loading metrics...

* Views captured on Cambridge Core between 24th January 2017 - 26th March 2017. This data will be updated every 24 hours.