Hostname: page-component-8448b6f56d-mp689 Total loading time: 0 Render date: 2024-04-24T00:36:13.380Z Has data issue: false hasContentIssue false
  • English
  • Français

UNRAVELING THE SKILL PREMIUM

Published online by Cambridge University Press:  24 January 2017

Peter McAdam  and
Alpo Willman
Peter McAdam*
Affiliation:
European Central Bank and University of Surrey
Alpo Willman
Affiliation:
University of Kent
*
Address correspondence to: Peter McAdam, Research Department, European Central Bank, Sonnemannstraße 60314, Frankfurt am Main, Germany; e-mail: peter.mcadam@ecb.europa.eu.
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

Skill PremiumInequalityMultilevel CES Production FunctionFactor-Augmenting Technical ProgressCapital-Skill Complementarity
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 1: Current Macroeconomic Challenges , January 2018 , pp. 33 - 62
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank two anonymous referees for helpful comments as well as Robert Chirinko, Fabrizio Colonna (discussant), and participants at numerous seminars. The views expressed are not necessarily those of the ECB.

References

REFERENCES

Acemoglu, D. (2002) Technical change, inequality, and the labor market. Journal of Economic Literature 40 (1), 7–72.CrossRefGoogle Scholar
Acemoglu, D. and Autor, D.H. (2011) Skills, tasks and technologies. In Ashenfelter, O. and Card, D. (eds.), Handbook of Labor Economics Vol. 4, Chap. 12, pp. 1043–1171. Elsevier.Google Scholar
Autor, D.H., Katz, L.F., and Kearney, M.S. (2008) Trends in U.S. wage inequality: Revising the revisionists. Review of Economics and Statistics 90 (2), 300–323.CrossRefGoogle Scholar
Autor, D.H., Katz, L.F., and Krueger, A.B. (1998) Computing inequality: Have computers changed the labor market? Quarterly Journal of Economics 113 (4), 1169–1213.CrossRefGoogle Scholar
Blanchard, O.J. (1997) The medium run. Brookings Papers on Economic Activity 2, 89–158.CrossRefGoogle Scholar
Bound, J. and Johnson, G. (1992) Changes in the structure of wages in the 1980's: An evaluation of alternative explanations. American Economic Review 82 (3), 371–392.Google Scholar
de La Grandville, O. (1989) In quest of the Slutsky diamond. American Economic Review 79 (3), 468–481.Google Scholar
Diamond, P.A., McFadden, D., and Rodriguez, M. (1978) Measurement of the elasticity of substitution and bias of technical change. In Fuss, M. and McFadden, D. (eds.), Production Economics, Vol. 2, pp. 125–147. Amsterdam: North Holland.Google Scholar
Dobbs, R., Madgavkar, A., Barton, D., Labaye, E., Manyika, J., Roxburgh, C., Lund, S., and Madhav, S. (2012). The World at Work: Jobs, Pay and Skills for 3.5 Billion People. McKinsey Global Institute.Google Scholar
Goldin, C. and Katz, L.F. (2010) The Race between Education and Technology. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
Gollin, D. (2002) Getting income shares right. Journal of Political Economy 110, 458–474.CrossRefGoogle Scholar
Gordon, R. (1990) The Measurement of Durable Goods Prices. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Greenwood, J., Hercowitz, Z., and Krusell, P. (1997) Long-run implications of investment-specific technological change. American Economic Review 87 (3), 342–362.Google Scholar
Griliches, Z. (1969) Capital-skill complementarity. Review of Economics and Statistics 51 (4), 465–468.CrossRefGoogle Scholar
Katz, L. and Murphy, K. (1992) Changes in relative wages, 1963–1987: Supply and demand factors. Quarterly Journal of Economics 107, 35–78.CrossRefGoogle Scholar
Klump, R. and de La Grandville, O. (2000) Economic growth and the elasticity of substitution: Two theorems and some suggestions. American Economic Review 90 (1), 282–291.CrossRefGoogle Scholar
Klump, R., McAdam, P., and Willman, A. (2007) Factor substitution and factor augmenting technical progress in the US. Review of Economics and Statistics 89 (1), 183–192.CrossRefGoogle Scholar
Klump, R., McAdam, P., and Willman, A. (2012) The normalized CES production function: Theory and empirics. Journal of Economic Surveys 26 (5), 769–799.CrossRefGoogle Scholar
Krusell, P., Ohanian, L., Rios-Rull, J.-V., and Violante, G. (2000) Capital-skill complementarity and inequality. Econometrica 68 (5), 1029–1053.CrossRefGoogle Scholar
León-Ledesma, M.A., McAdam, P., and Willman, A. (2010) Identifying the elasticity of substitution with biased technical change. American Economic Review 100 (4), 1330–1357.CrossRefGoogle Scholar
León-Ledesma, M.A., McAdam, P., and Willman, A. (2015) Production technology estimates and balanced growth. Oxford Bulletin of Economics and Statistics 77 (1), 40–65.CrossRefGoogle Scholar
McAdam, P. and Willman, A. (2013) Medium run redux. Macroeconomic Dynamics 17 (4), 695–727.CrossRefGoogle Scholar
Mućk, J., McAdam, P., and Growiec, J. (2015) Will the True Labor Share Stand UP? Analyzing Alternate US Labor Shares. Working Paper Series 1175, European Central Bank.CrossRefGoogle Scholar
Sato, K. (1967) A two-level constant-elasticity-of-substitution production function. Review of Economic Studies 34 (2), 201–218.CrossRefGoogle Scholar
Tinbergen, J. (1974) Substitution of graduate by other labour. Kyklos 27 (2), 217–226.CrossRefGoogle Scholar
Supplementary material: PDF

McAdam and Willman supplementary material

McAdam and Willman supplementary material 1

Download McAdam and Willman supplementary material(PDF)
PDF 355.8 KB