Skill Complementarity Research Articles

A Non-parametric Examination of Capital-Skill Complementarity

This paper uses non-parametric 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 labour and the elasticity of substitution measure being used. The added flexibility of the non-parametric procedure is also capable of uncover ing that the elasticities of substitution vary across countries, groups of countries and time periods.

Human Capital Spillovers, Labor Migration and Regional Development in China

This study applies unique data from the 1990s period of economic liberalization in China to evaluate the effects of human capital spillovers on urbanization and regional agglomeration of human capital. We examine these effects via a utility maximizing directional migration model, which accounts for heterogeneous migration costs and benefits among population strata. We use model estimates to decompose and evaluate human capital spillover effects as derive from three distinct sources, including productivity effects (social returns to schooling), skill premia (skill complementarity in production), and non-wage benefits (quality of life and learning opportunities). In contrast to extant literature emphasizing skill complementarity, we find significantly stronger non-wage than wage effects in the determination of regional human capital agglomeration. However, among low-skill migrants, non-wage benefits are substantially reduced - due likely to urban segregation that deprives low-skill migrants of social externalities. This finding suggests limited human capital spillovers among low-skill migrants and hence dampened long-run growth benefits to Chinese urbanization. Finally, we find that urban concentration of skilled workers was more important than foreign direct investment, the prominent source of technology transfer in China during the 1990s, in attracting skilled workers.

Skill Dispersion and Trade Flows

Is skill dispersion a source of comparative advantage? In this paper we use microdata from the International Adult Literacy Survey to show that the effect of skill dispersion on trade flows is quantitatively similar to that of the aggregate endowment of human capital. In particular we investigate, and find support for, the hypothesis that countries with a more dispersed skill distribution specialize in industries characterized by lower complementarity of workers' skills. The result is robust to the introduction of controls for alternative sources of comparative advantage, as well as to alternative measures of industry-level skill complementarity. (JEL F14, F16, J24, J31)

Technological change and income distribution in Europe

Abstract.This article provides empirical evidence of the link between technological change and overall income inequality in 14 EU countries. The analysis begins by testing the skill‐biased technological change (SBTC) hypothesis in sectors with different levels of technology intensity. After confirming the skill complementarity of technology and the predominantly skill‐replacing character of investment, the analysis turns to sectoral changes in skilled‐labour demand as a possible determinant of income inequality. It finds a non‐linear relationship between SB TC and inequality in five of the eight sectors considered, suggesting an inverted U‐shaped pattern that can be explained by stages in labour demand and supply adjustments over time.

Valuing Skill Differences

This article reports effects of perceived skill dissimilarity and perceived skill complementarity on dyadic helping behavior using a cross-lagged panel study. Specifically, the authors hypothesize that perceived skill dissimilarity is negatively related, whereas perceived skill complementarity is positively related, to self-rated and peer-rated dyadic helping behavior in teams. The authors compare the effects of both perceptions in a sample of 301 unilateral work relationships within 20 student research teams. The study shows that perceived skill dissimilarity is unrelated to self-rated and peer-rated dyadic helping behavior whereas perceived skill complementarity is positively related to both self-rated and peer-rated dyadic helping behavior.

Human Capital Accrual, Skill Complementarity, and Urban Migration: New Evidence from China

This study seeks to distinguish among competing theories of urbanization in an explanation of recent, massive rural-to-urban migration in China. Specifically, the research evaluates whether Chinese urbanization following the 1990s liberalization of mobility and residential location restrictions was driven by migrant learning opportunities as in the skill-transition urbanization technology (Lucas, 2004), or instead was associated with a traditional dual-skill urbanization technology in which opportunities for migrant skill upgrading were largely absent. The analysis is facilitated by the application of an unusually rich data set to estimate skill-based selection of Chinese migrants in the context of a utility-maximizing directional migration model. Research findings suggest substantial differentials across skill-based strata in migratory response to regional disparities in returns to education. Model simulation further indicates that those disparities derive largely from regional variations in human capital rather than from positive skill complementarities in production (Giannetti, 2003; Berry and Glaeser, 2005) and accordingly serve to encourage regional convergence in human capital concentration. Further, results fail to support the hypothesis that benefits of human capital externalities in learning accrue to low-skilled migrants. According to Lucas (2004), such benefits operate as a key mechanism for economic transition from a dual-skill economy to a modern urbanized economy. The lack of such human capital externalities is consistent with the pervasiveness of institutional barriers in China which sustained urban segregation in occupation and social interactions to the disadvantage of low-skilled migrants (Wang and Zuo, 1999). Our estimates do show strong social interaction benefits for the educated population strata, which contributed to regional divergence in human capital concentration.

Two‐level CES Production Technology in the Solow and Diamond Growth Models*

AbstractThe two‐level CES aggregate production function—that nests a CES into another CES function—has recently been used extensively in theoretical and empirical applications of macroeconomics. We examine the theoretical properties of this production technology and establish existence and stability conditions of steady states under the Solow and Diamond growth models. It is shown that in the Solow model the sufficient condition for a steady state is fulfilled for a wide range of substitution parameter values. This is in sharp contrast with the two‐factor Solow model, where only an elasticity of substitution equal to one is sufficient to guarantee the existence of a steady state. In the Diamond model, multiple equilibria can occur when the aggregate elasticity of substitution is lower than the capital share. Moreover, it is shown that for high initial levels of capital and factor substitutability, the effect of a further increase in a substitution parameter on the steady state depends on capital–skill complementarity.

Education, demographics, and the economy

AbstractThis paper deals with two issues concerning the effects of population aging on education decisions in the presence of a PAYG pension system: We first analyze the effects of an aging population per se on individual skill choices and continuous education and the production structure. Second, we study the implications of postponed retirement, which is often proposed as a measure to cope with the economic challenges of increased longevity. Our study uses a dynamic general equilibrium framework with overlapping generations and probabilistic aging. The model allows for capital–skill complementarity in the production of final output.As a response to population aging, in a small open economy with a fixed interest rate, our first simulation shows that GDP is depressed due to an adverse effect on skill choice and labor supply. We then introduce postponed retirement as a potentially dampening policy measure due to its encouragement of human capital formation. However, since there is less private saving in this scenario, the overall effect on GDP is even worse than in the pure aging scenario.

Capital–skill complementarity and inequality: A sensitivity analysis

Krusell et al. in [Krusell, P., Ohanian, L., Ríos-Rull, J.V., Violante, G.L., 2000. Capital–skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029–1053] analyzed the capital–skill complementarity hypothesis as an explanation for the behavior of the US skill premium. We refit Krusell et al.'s [Krusell, P., Ohanian, L., Ríos-Rull, J.V., Violante, G.L., 2000. Capital–skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029–1053] model with two alternative capital equipment price series: One proposed by Greenwood et al. [Greenwood, J., Hercowitz, Z., Krusell, P., 1997. Long-run implications of investment-specific technological change. Amer. Econ. Rev. 87 (3), 342–362] and the official, revised National Income and Product Accounts (NIPA) data. We find that capital–skill complementarity is preserved, but other results were sensitive to the data used. Specifically, the fit of the model was similar to Krusell et al.'s [Krusell, P., Ohanian, L., Ríos-Rull, J.V., Violante, G.L., 2000. Capital–skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029–1053] using the NIPA data, but not the Greenwood et al. [Greenwood, J., Hercowitz, Z., Krusell, P., 1997. Long-run implications of investment-specific technological change. Amer. Econ. Rev. 87 (3), 342–362] data. Also, both series produce estimates of the elasticity of substitution between unskilled labor and equipment that are substantially larger than Krusell et al.'s [Krusell, P., Ohanian, L., Ríos-Rull, J.V., Violante, G.L., 2000. Capital–skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029–1053] estimates.

Investment-specific technological change, skill accumulation, and wage inequality

Wage inequality between education groups in the United States has increased substantially since the early 1980s. The relative number of college-educated workers has also increased dramatically in the postwar period. This paper presents a unified framework where the dynamics of both skill accumulation and wage inequality arise as an equilibrium outcome driven by measured investment-specific technological change. Working through equipment–skill complementarity and endogenous skill accumulation, the model does well in capturing the steady growth in the relative quantity of skilled labor during the postwar period and the substantial rise in wage inequality after the early 1980s. Based on the calibrated model, we examine the quantitative effects of some hypothetical tax-policy reforms on skill accumulation, wage inequality, and welfare.

Capital–skill complementarity and the immigration surplus

We build a neoclassical growth model with overlapping dynasties and capital–skill complementarities to evaluate changes in immigration policy. Calibrating the model using US data, we quantify the differential effects of skilled and unskilled immigration on factor returns and on the welfare of different sectors of the population. An influx of high-skilled immigrants lowers the wages of skilled workers, raises the wages of unskilled workers, and because of the relative complementarity between capital and skilled labor, substantially raises the rate of return to native-owned capital. By contrast, an influx of unskilled immigrants produces an opposite effect on wages, and has only a negligible effect on the return to capital. Because of capital–skill complementarity, an increase in the number of skilled immigrants generates an immigration surplus—the overall welfare benefit accruing to the native population—that is approximately ten times larger than the immigration surplus generated by an identical increase in the number of unskilled immigrants. This differential welfare effect is far higher than can be accounted for by the disparity between the productivities of each type of worker.

Capital–skill complementarity and the redistributive effects of Social Security Reform

This paper analyses the general equilibrium implications of reforming pay-as-you-go pension systems in an economy with heterogeneous agents, human capital investment and capital–skill complementarity. It shows that increasing funding, by raising savings, delivers in the long run higher physical and human capital and therefore higher output, but also higher across-group wage and income inequality. It also shows that the general equilibrium effects induced by this reform affect groups' sizes in a way that the higher across-group inequality generated by more funding goes with a larger share of the population against redistribution.

Low-skilled unemployment, capital-skill complementarity and embodied technical progress

SummaryModels developed by recent economic literature do not manage to account simultaneously for the three main stylized facts observed in many EU countries since the mid-seventies: (i) the increase in the overall unemployment rate; (ii) the difference between high-skilled and low-skilled unemployment; (iii) the stability of relative wages. This paper focuses on these issues. We construct an intertemporal general equilibrium model seeking to reproduce these facts. We consider two types of jobs and two types of workers. We allow for job competition between high- and low-skilled workers on the low-skilled segment of the labor market and for on-the-job search. Matching processes are represented by matching functions á la Pissarides. Low-skilled search intensities are endogenous and high-skilled workers decide on the amount of effort they devote to search in each labor market segment. Biased technological change is introduced via embodied technical progress and capital- skill complementarity. The model is calibrated and simulated to evaluate the impact of various types of shocks. The model reproduces quite well the unemployment rate changes and the relative wage stability observed over the past two decades.

Rising wage inequality and capital–skill complementarity

Increased wage inequality has been a sensitive policy issue in OECD economies in recent decades. A shortcoming in the literature investigating its causes, especially with regard to the role of new technology, is that technical change is commonly determined residually. We address this limitation by specifying a computable general equilibrium (CGE) model that identifies four labour types and three capital assets. When capital assets are measured in efficiency units and there is capital–skill complementarity, we can explain a large component of the increase in UK wage inequality over the 1980–1997 period in terms of changes in factor endowments. This result has implications for how policy makers might react to rising skill premiums.

Unemployment and endogenous growth with new technologies–skill complementarity

Models developed by recent economic literature do not manage to account simultaneously for the three main stylized facts observed in many EU countries since the mid-seventies: (i) the increase in the overall unemployment rates, particularly in that of low-skilled workers; (ii) the stability of relative wages; (iii) the deceleration in per capita output growth rates. This paper focuses on these issues. We construct an endogenous growth intertemporal general equilibrium model with two types of jobs and two types of workers. We allow for job competition between high- and low-skilled workers on the low-skilled segment of the labor market and for on-the-job search for high-skilled workers. Matching processes are represented by matching functions à la Pissarides. Workers search intensities are endogenous. We distinguish between embodied and disembodied technological progress and endogenize them through a learning-by-doing process based on capital accumulation. Biased technological change is introduced via embodied technical progress and new technologies–skill complementarity relationship. When simulated the model provides satisfactory results in reproducing the observed stylized facts.

Capital–Skill Complementarity and Inequality in Sweden

AbstractIncome inequality increased in Sweden during the 1980s and 1990s, as did the returns to higher education. The main conclusion of this study is that increased income inequality between high‐ and low‐skilled workers is demand driven and is due to the presence of capital–skill complementarity in production. Increased investments in new, more efficient capital equipment, along with a slowdown in the growth rate of skilled labor, have raised the ratio of effective capital inputs per skilled worker, which, in turn, has increased the relative demand (and market return) for skilled labor through the capital–skill complementarity mechanism.

Physical capital stock, technological upgrading and modernisation in Hungary

This paper discusses the relation between the quality and quantity indicators of physical capital and modernisation. While international academic literature emphasises the role of intangible factors enabling technology generation and absorption rather than that of physical capital accumulation, this paper argues that the quantity and quality of physical capital are important modernisation factors, particularly in the case of small, undercapitalised countries that recently integrated into the world economy. The paper shows that in Hungary, as opposed to developed countries, the technological upgrading of capital assets was not necessarily accompanied by the upgrading of human capital i.e. the thesis of capital skill complementarity did not apply to the first decade of transformation and capital accumulation in Hungary. Finally, the paper shows that there are large differences between the average technological levels of individual industries. The dualism of the Hungarian economy, which is also manifest in terms of differences in the size of individual industries' technological gaps, is a disadvantage from the point of view of competitiveness. The increasing differences in the size of the technological gaps can be explained not only with industry-specific factors, but also with the weakness of technology and regional development policies, as well as with institutional deficiencies.

Nonlinearities in Capital?Skill Complementarity

This paper uses a novel dataset to test the capital–skill complementarity hypothesis in a cross-section of countries. It is shown that for the full sample there exists evidence in favor of the hypothesis. When we arbitrarily split the full sample into OECD and non-OECD countries, we find no evidence in favor of the hypothesis for the OECD subsample, but strong evidence for the non-OECD subsample. When we use Hansen’s [Econometrica 68 (2000) P. 576] endogenous threshold methodology we find that initial literacy rates and initial per capita output are threshold variables that can cluster countries into three distinct regimes that obey different statistical models. In particular, the regime with moderate initial per capita income but low initial education exhibits substantially higher capital–skill complementarity than the regime with low income and low education and the regime with high education. This cross-country nonlinearity in capital–skill complementarity is consistent with the time-series nonlinearity found by Goldin and Katz [Quarterly Journal of Economics 113 (1998) 693] using U.S. manufacturing data, and promotes the view that the phenomenon maybe a transitory one.

SOCIAL STRATIFICATION, CAPITALSKILL COMPLEMENTARITY, AND THE NONMONOTONIC EVOLUTION OF THE EDUCATION PREMIUM

This paper presents a model that generates a nonmonotonic evolution of the return to education. The model highlights the role played by socioeconomic stratification in the joint determination of the supply of educated labor and the supply of physical capital. The recent theoretical literature attributes the increased education premium of the last decades to skill-biased technological progress. In contrast, our explanation is based on capital–skill complementarity and endogenous accumulation of physical and human capital in an environment characterized by credit constraints.

Endogenous skill bias

Based on a capital–skill complementarity in short-run technologies, this paper explains why technical change is rarely biased in favor of the unskilled and often against them. Firms choose the most profitable innovation out of a large set of potential innovations, some of which are more unskilled labor saving while others are more skilled labor saving. Assuming that for the production technologies known at any given point in time physical capital is a closer substitute for unskilled labor than for skilled labor, we show that technical change cannot be persistently biased against the skilled, while it can easily turn against the unskilled. No asymmetry in innovation possibilities needs to be assumed for this endogenous skill bias—to the contrary, innovation possibilities may even be strongly biased against the skilled.