Can Capital-Skill Complementarity Explain the Rising Skill Premium in Developing Countries? Evidence from Peru in the 1990s

Joy Mazumdar

doi:10.18800/economia.201901.004

Abstract

The unsettled discussion continues about the factors behind the increase in the relative wages of skilled workers in developing countries. Using data from Peru for the years 1994 to 2000, we analyze the determinants of within-industry share of skilled workers. We use a translog cost function for gross output and are therefore able to incorporate the effects of materials, both domestic and imported, in addition to capital. We find that capital accumulation can explain a large fraction of the increase in the wage bill share and relative wages of skilled labor. This finding is contrary to the commonly held view that unobservable technological change is responsible for the rising skill premium in both developing and developed economies. A test for separability indicates that a gross output cost function is the appropriate one to use, and therefore share equations based on value-added cost functions could be misspecified.

Highlights

Many developing countries have experienced an increase in the relative wages of skilled workers following trade liberalization, as has been well documented
Our data comes from the Annual Survey of Manufactures for Peru collected by Ministerio de Industria, Turismo, Integración y Negociaciones Comerciales Internacionales (MITINCI)
We show in this paper that there has been a substantial shift in demand in favor of skilled workers in Peru during the latter half the 1990s

Summary

Introduction

Many developing countries have experienced an increase in the relative wages of skilled workers following trade liberalization, as has been well documented (see, for example, Robbins, 1996; Wood, 1997; Hanson and Harrison, 1999). Since this is contrary to the predictions of standard Heckscher-Ohlin model of trade, skilled biased technological change has been cited as a possible explanation for this phenomenon. If technology were the culprit, these shares would be changing in the favor of skilled workers within industries

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