Capital-skill Complementarity Hypothesis Research Articles

AI-driven capital-skill complementarity: Implications for skill premiums and labor mobility

To explain the newly discovered coevolution of capital and labor structures, this study presents a modified capital-skill complementarity hypothesis within the framework of structural transformation. We propose that artificial intelligence (AI) and skilled labor exhibit relative complementarity. Specifically, advancements in AI services or AI-enhanced technologies incentivize the mobilization of skilled labor across different industry sectors. The direction of this labor movement is contingent upon variations across industry sectors, including AI output elasticity and the substitutability between AI and conventional production methods. This structural transformation process also induces fluctuations in skill premiums.

The paradox of aging population and firm digital transformation in China

Although a number researchers have acknowledged that the aging population inhibits firm digital transformation, others find it promoting digital transformation in some firms. As the relevant literature to clarify such paradox is still scare, this paper wants to fill the gap regarding the labor cost theory, the capital-skill complementarity hypothesis, and the human capital externality theory. Based on the empirical tests of Chinese A-share listed companies from 2001 to 2022, this study detected a U-shaped relationship between the aging population and digital transformation. In terms of the institutional environment, higher marketization strengthens the U-shaped relationship by making the slopes on either side of it steeper. However, higher minimum wage levels weaken the U-shaped relationship. In terms of firm strategy, firms with stronger marketing capabilities strengthened the U-shaped relationship. However, firms with higher customer concentration weakened the U-shaped relationship. Overall, we enriched scholarly understanding of the impact of the aging population on digital transformation and demonstrated the dual potential impact of aging populations. Instead of assuming they are detrimental to the economy and society, positive contributions in the form of innovation and progress for companies can be detected.

Does environmental regulation affect capital-labor ratio of manufacturing enterprises: Evidence from China

Currently, China faces the dual pressures of finding ways to address the unstable ecological environment improvement and rising labor costs. All sectors of society are concerned about how to perfect the structure of enterprise factors input to improve production efficiency and adapt to high-quality economic development. This paper examines the impact of environmental regulation on the capital-labor ratio of manufacturing enterprises in China. The results indicate that the implementation of the new EPL (Environmental Protection Law) increases the capital-labor ratio of heavy polluting manufacturing enterprises. This conclusion is still robust to parallel trend tests, considering sample selection bias, random factors, as well as expected effects. Enterprises response to the new EPL by increasing capital factors input and hiring high-skilled labor, which is in line with the capital-skill complementarity hypothesis and reflects the views of Karabarbounis and Neiman (2014). In addition, this study investigates the effects of capital deepening on the production and operational efficiency of heavy-polluting manufacturing firms. Results show that the implementation of the new EPL can facilitate the reduction of enterprise's production costs and the improvement of total factor productivity.

The decline in capital-skill complementarity

We revisit the capital-skill complementarity hypothesis and examine whether and under what conditions this mechanism can explain the developments in wage inequality and labor share in the 1963–2016 period. Krusell, Ohanian, Ríos-Rull and Violante (2000) show that a model with capital-skill complementarity mechanism matches the data well and can account for changes in wage inequality in the 1963–1992 period. We show that applying the model to the 1963–2016 period delivers a good fit for the skill premium; however, it does not match the declining pattern in labor share in the last two decades. We modify the model to allow for a flexible technology structure and show that the degree of capital-skill complementarity is declining over time. The augmented model with time-varying capital-skill complementarity suggests explanations for the declining labor share.

The Decline in Capital-Skill Complementarity

We revisit the capital-skill complementarity hypothesis and examine whether and under what conditions this mechanism can explain the developments in wage inequality and labor share in the 1963–2016 period. Krusell, Ohanian, Rios-Rull, and Violante (2000) show that a model with capital-skill complementarity mechanism matches the data well and can account for the changes in wage inequality in the 1963–1992 period. We show that applying the model to the 1963–2016 period delivers a good fit for the skill premium; however, it does not predict the declining pattern in labor share in the last two decades. We modify the model to allow for a flexible technology structure and show that the degree of capital-skill complementarity is declining over time. The model with time-varying capital-skill complementarity can match the changes in skill premium and labor share in the 1963–2016 period.

The Decline in Capital-Skill Complementarity

We revisit the capital-skill complementarity hypothesis and examine whether and under what conditions this mechanism can explain the developments in wage inequality and labor share in the 1963–2016 period. Krusell, Ohanian, Rios-Rull, and Violante (2000) show that a model with capital-skill complementarity mechanism matches the data well and can account for the changes in wage inequality in the 1963–1992 period. We show that applying the model to the 1963–2016 period delivers a good i¬ t for the skill premium; however, it does not predict the declining pattern in labor share in the last two decades. We modify the model to allow for a i¬‚exible technology structure and show that the degree of capital-skill complementarity is declining over time. The model with time-varying capital-skill complementarity can match the changes in skill premium and labor share in the 1963–2016 period.

Capital-skill complementarity and biased technical change across US sectors

The goal of this paper is two-fold. First, we reexamine the evidence for the capital-skill complementarity (CSC) and the skill-biased technological change (SBTC) hypotheses at the sectoral level in the US economy for the period 1970–2005. Second, we quantify their effect on the evolution of the wage skill premium. To do so, we estimate a translog model with three production factors (skilled labor, unskilled labor, and capital) for different sets of industry aggregates suggested by the literature. At the aggregated level, we find that both CSC and SBTC explain a substantial part of the observed change in the skill premium. The CSC hypothesis also receives support across sectors, although SBTC often explains a larger part of the premium change. We also find that the relevance of CSC increases with the level of aggregation of the data. Besides, when we disaggregate capital into ICT and non-ICT, our results suggest that often ICT capital is not the primary source of CSC. However, ICT-CSC is the most important driver of the skill premium in specific sectors, such as financial and business services.

Capital-Skill Complementarity and Biased Technical Change Across US Sectors

Abstract The goal of this paper is two-fold. First, we reexamine the evidence for the capital-skill complementarity (CSC) and the skill-biased technological change (SBTC) hypotheses at the sectoral level in the US economy for the period 1970–2005. Second, we quantify their effect on the evolution of the wage skill premium. To do so, we estimate a translog model with three production factors (skilled labor, unskilled labor, and capital) for different sets of industry aggregates suggested by the literature. At the aggregated level, we find that both CSC and SBTC explain a substantial part of the observed change in the skill premium. The CSC hypothesis also receives support across sectors, although SBTC often explains a larger part of the premium change. We also find that the relevance of CSC increases with the level of aggregation of the data. Besides, when we disaggregate capital into ICT and non-ICT, our results suggest that often ICT capital is not the primary source of CSC. However, ICT-CSC is the most important driver of the skill premium in specific sectors, such as financial and business services.

Labor demand and ICT adoption in Spain

Spain is delayed in adopting information and communication technologies (ICT) and its productivity per hour worked presents a downward trend since the mid-90s. In this paper we argue that these two facts are related. Using the EU KLEMS dataset we test the capital-skill complementarity hypothesis in a cross-section of sectors in Spain. We find that the substitutability between workers and ICT assets falls as worker skill level rises, and that this feature holds across all sectors. Furthermore, the ICT assets are complementary with skilled workers. The fraction of workers employed with medium and high skills across sectors rose by 21% and 12%, respectively, to the disadvantage of low skilled workers, due to an adjustment within sectors more than to a composition effect between sectors. Finally, using a regression analysis, we conclude that some labor market institutions are likely behind the evolution of sectorial productivity and ICT investment in Spain.

A Nonparametric Examination of Capital-Skill Complementarity

This paper uses nonparametric kernel methods to construct observation-specific elasticities of substitution for a balanced panel of 73 developed and developing countries to examine the capital-skill complementarity hypothesis. The exercise shows some support for capital-skill complementarity, but the strength of the evidence depends upon the definition of skilled labor and the elasticity of substitution measure being used. The added flexibility of the nonparametric procedure is also able to uncover that the elasticities of substitution vary across countries, groups of countries and time periods.

Capital-Skill Complementarity and Inequality: A Sensitivity Analysis

In Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis, Krusell et al. (2000) analyzed the capital-skill complementarity hypothesis as an explanation for the behavior of the U.S. skill premium. This paper shows that their model's fit and the values of the estimated parameters are very sensitive to the data used: Alternative measures of the capital series predict skill premia that bear little resemblance to the data. We also include ten additional years of data to address the claim made by other authors that the evolution of the skill premium changed during the 1990s, but we find little evidence of this change.

Importance of Substitutability Between Factors of Production in Explaining a Changing Wage Differential

Rising wage differential during the last two decades has become a hot topic of discussion among the academics as well as the politicians and policy makers. One of the popular but debated reasons put forward is skill-biased technological change argument. However, since skill is hard to measure, so is the skill-bias of technological change. Also economists suspect that increasing free trade between countries may have a prominent role to play in this ongoing debate. In this study, a trade model is used to investigate the rising wage differential. The main finding of this paper is that a skill-biased technological change is neither necessary nor sufficient for increasing wage differential in the presence of trade. In other words, even in the presence of a skill-biased technological change we may see a converging wage differential depending on the substitutability between the factors and their distributive shares. To investigate the role of substitutability between the inputs, a translog cost function is used. I use an aggregate dataset on the Indian manufacturing sector for this study. I find complementary relationship between production and non-production workers. Using Hicksian definition of factor bias, I do not find any evidence of a technological change that favors the non-production workers (used as a proxy for skilled workers in many studies). However non-production workers may not always be a good proxy for skilled workers. Also the production process became more capital intensive in the Indian manufacturing industry. Following Griliches' capital-skill complementarity hypothesis, this supports the idea of increasing usage of skill in the production. Thus the evidence of skill-biased technological change is, at best, inconclusive.

Why do Capital Intensive Companies Pay Higher Wages?

An obvious answer to this question is the capital-skill complementarity hypothesis originally proposed by Zwi Griliches (1969). But the relatively poor performance of this hypothesis suggests that other explanations are needed. Here we consider the labour union behaviour in the wage bargaining process as such an alternative. The explanation is based on the observation that capital intensive companies are more vulnerable to strike threats and may thus more easily give in for union wage demand. Thus, the bargaining power of unions is related to the capital-labour ratio. This paper provides some tests for these hypotheses with panel data for Finnish companies. The results give support to the wage bargaining hypothesis.

Capital-Skill Complementarity? Evidence from a Panel of Countries

Since Griliches (1969), researchers have been intrigued by the idea that physical capital and skilled labor are relatively more complementary than physical capital and unskilled labor. This capital-skill complementarity hypothesis has received renewed attention recently, as researchers have suggested that this phenomenon might account for rising wage inequality between skilled and unskilled workers in several developed countries. In this paper we consider the cross-country evidence for capital--skill complementarity using a time-series, cross-section panel of 73 developed and less developed countries over a 25 year period. In particular, we focus on three empirical issues. First, what is the best specification of the aggregate production technology to address the capital-skill complementarity hypothesis. Second, how should we measure skilled labor? Finally, is there any cross-country evidence in support of the capital-skill complementarity hypothesis? Our main finding is that we are unable to reject the null hypothesis of no capital-skill complementarity using our panel data set.

Capital–skill complementarity and inequality over the business cycle

When capital–skill complementarity is present in the production process, changes in the skill premium are driven not only by changes in the ratio of unskilled to skilled labor inputs (as they are in the case with Cobb–Douglas production), but also by changes in the capital–skill ratio. A simple regression analysis demonstrates that the capital–skill ratio has a positive and significant relation to the skill premium at business cycle frequencies as predicted by the capital–skill complementarity hypothesis. This finding motivates the construction of a stochastic dynamic general equilibrium model that allows for capital–skill complementarity in production. The model with capital–skill complementarity can account for the cyclical behavior of the skill premium and much of its volatility. The model without capital–skill complementarity cannot. These results, together with the available empirical evidence, suggest that capital–skill complementarity is an important determinant of wage inequality over the business cycle.

Rejecting Capital-Skill Complementarity at all Costs

Any serious empirical study of factor substitutability has to allow the data to display complementarity as well as substitutability. The standard approach reflecting this idea is a translog specification - this is also the approach used by numerous studies analyzing the relative capital-skill complementarity hypothesis formulated by GRILICHES (1969). According to this hypothesis, the degree of substitutability between skilled labor and capital is lower than that for unskilled labor and capital. Yet, the results of empirical studies investigating this hypothesis are controversial. This paper offers a straightforward explanation: Using a translog approach reduces the issue of factor substitutability or complementarity to a question of cost shares. Our review of translog studies mentioned in HAMERMESH's (1993) summary on the demand for heterogeneous labor demonstrates that this argument is empirically relevant - all these studies can be reconciled with each other on the basis of the cost-share argument.

Rejecting Capital-Skill Complementarity at All Costs

Any serious empirical study of factor substitutability has to allow the data to display complementarity as well as substitutability. The standard approach reflecting this idea is a translog specification – this is also the approach used by numerous studies analyzing the relative capital-skill complementarity hypothesis formulated by GRILICHES (1969). According to this hypothesis, the degree of substitutability between skilled labor and capital is lower than that for unskilled labor and capital. Yet, the results of empirical studies investigating this hypothesis are controversial. This paper offers a straightforward explanation: Using a translog approach reduces the issue of factor substitutability or complementarity to a question of cost shares. Our review of translog studies mentioned in HAMERMESH?s (1993) summary on the demand for heterogeneous labor demonstrates that this argument is empirically relevant – all these studies can be reconciled with each other on the basis of the cost-share argument.

Flexibilität der Qualifikationsstruktur aus betrieblicher Sicht: Substitutionalität oder Komplementarität / Flexibility of Firms’ Labor Demand: Substitutability or Complementarity

Zusammenfassung Auf der Basis eines zusammengefügten Datensatzes aus dem IAB-Betriebspanel und der Historikdatei der Beschäftigtenstatistik wurde für 1995 für das westdeutsche Produzierende Gewerbe ein Translog-Kostensystem für sechs Qualifikationsgruppen (Arbeiter und Angestellte jeweils in un-/angelernte, qualifizierte und hochqualifizierte Beschäftigte unterteilt) geschätzt. Untersucht wurden die aus der betrieblichen Kostenfunktion für unterschiedlich qualifizierte Qualifikationsgruppen sich ergebenden Substitutionsmöglichkeiten. Die ermittelten Substitutionsbeziehungen innerhalb der einzelnen Arbeitergruppen sind denen innerhalb der einzelnen Angestelltengruppen sehr ähnlich: Qualifizierte - und zu einem geringeren Maße auch Hochqualifizierte - erweisen sich als Substitute für Un-/Angelernte. Dies könnte zumindest teilweise den Anstieg der Arbeitslosigskeit der Un- und Angelernten erklären. Demgegenüber werden Qualifizierte und Hochqualifizierte vom Lohn der jeweils anderen Gruppe nicht beeinflußt. Eine mit der Qualifikation abnehmende Eigenlohnelastizität zeigt sich zwischen Qualifizierten und Hochqualifizierten, nicht jedoch zwischen Un-/Angelernten und Qualifizierten. Zwischen Arbeitern und Angestellten sind die Substitutionsbeziehungen relativ gering, wobei un-/angelernte, qualifizierte und hochqualifizierte Arbeiter jeweils zur analogen Angestelltengruppe in komplementärer Beziehung stehen. Schließlich kann die These einer stärkeren Komplementarität zwischen qualifizierten Arbeitskräften und Sachkapital als zwischen nicht formal qualifizierten Arbeitskräften und Sachkapital nicht bestätigt werden.

Skills, Wages and Employment in East and West Germany

FITZROY F. and FUNKE M. (1998) Skills, wages and employment in east and west Germany, Reg. Studies 32 , 459-467. Disaggregated data from 28 two-digit manufacturing industries in the east and west parts of unified Germany are used to estimate employment for three skill categories of blue collar workers. Employment elasticities are uniformly higher for unskilled labour. The results contradict union claims that wages had little relevance for east German job losses, and confirm the capitalskill complementarity hypothesis. FITZROY F. et FUNKE M. (1998) Compétences, salaires et emploi dans l'est et l'ouest de l'Allemagne, Reg. Studies 32 , 459-467. A partir des données décomposées provenant de vingt-huit industries à deux chiffres situées dans l'est et l'ouest de l'Allemagne unifiée, on fait une estimation de l'emploi pour trois catégories de compétences des ouvriers. Les élasticités de l'emploi s'avèrent uniformément plus élevées pour les ouvriers non-qualifiés. Les résultats contredisent les déclarations des syndicats selon lesquelles les salaires ont peu d'intérêt avec les suppressions d'emplois dans l'est de l'Allemagne, et viennent à l'appui de l'hypothèse qui prône la complémentarité du capital et des compétences. FITZROY F. und FUNKE M. (1998) Qualifikation, Löhne und Erwerbstätigkeit in Ost- und Westdeutschland, , Reg. Studies 32 , 459‐467. Es werden getrennte Daten von 28 zweistelligen herstellenden Industrien in den östlichen und westlichen Teilen des vereinigten Deutschland dazu benutzt, Erwerbstätigkeit für drei Qualifikationsstufen zu schätzen. Die Beschäftigungselastizität ist durchweg höher bei ungelernten Arbeitern. Die Ergebnisse widerlegen die Behauptungen der Gewerkschaften, daß zwischen Löhnen und Stellenverlusten in Ostdeutschland wenig Beziehung besteht und bestätigen die Hypothese deskomplimentären Verhaltens von Kapital und Fähigkeiten.

Estimating elasticities of substitution by the CDE production function: an application to Japanese manufacturing industries

Using time-series data from Japanese manufacturing industries, the capital–skill complementarity hypothesis is tested by estimating eslasticities from a CDE production function. The first component...