The race between education and technology in Chile and its impact on the skill premium

Abstract

While studies using pre-2000 data for Chile implied that technological change drives the skill premium evolution, post-2000 data suggests that the supply of skilled labour expansion has reduced this premium. In contrast, literature shows a consistent link between technology and the growing demand for skilled labour, despite educational improvements, leading to skill premium increases. We examine these interactions under the race between education and technology model (RBET) for Chile between 1980 and 2018 considering the inconsistent findings (e.g., negative elasticities) reported by past studies. We also find inconsistencies using cointegration techniques. Alternatively, we apply an Unobserved Component Model using a Bayesian estimation that enforces the required economic and theoretical conditions. We find that, before the 2000s, the technological change dominated. However, in the 2000s, the demand was surpassed by educational supply increases, reducing the premium. The estimated elasticity of substitution between skilled and unskilled labour is 6.5, implying that both are more substitutable than commonly thought.