Wage Skill Premium Research Articles

Rural-Urban Migration and the Skill Wage Premium in Brazil: 1980-2000

We use a production function approach to determine the impact of increased labour supply of different skill level on the skill wage premium. In particular, we use data the Brazilian Population Census for 1980 to 2000, for which we have consistent data on cities, to estimate the elasticity of substitution between high and low-skill workers. Unlike the international migration literature, we can estimate the response of out migration from rural areas in response to exogenous shocks, such as rainfall shocks and changes in transportation costs, and use the predicted value from these shocks to construct our instrumental variable. We nd an elasticity of substitution between high and low-skill workers of 0.56, much lower than what has been found in the international migration literature. Our simulations show that migration between 1991 and 2000 had only a small impact of the skill wage gap, a 1.1% decrease in the wage gap between high and low-skill workers in Brazil, explaining only 5% of the changes in relative wages between high and low-skill workers seen in the data during this time period. Though this impact is small is it is 2.5 times larger than what we would have found using the elasticity of substitution between high and low-skill of developed countries.

Reshaping the schooling system: The role of immigration

This paper studies how the schooling system may be impacted by the number and skill type of immigrants. When the number of low-skilled immigrants is large, the education regime tends to become segregated. Wealthy locals are more likely to choose private schools and vote for a lower tax rate to finance public education. In contrast, high-skilled immigrants tend to reinforce the public system. The optimal immigration policy is highly skill-biased. The admission of high-skilled immigrants expedites redistribution toward the less-skilled local households through both a stronger fiscal support for public education and a reduction in the skill wage premium.

Technological Change, Skill Demand, and Wage Inequality in Indonesia

This paper examines the empirical implications of technological changes for skill demand and wage inequality in Indonesia. According to the National Labor Force Survey of Indonesia, the share of educated workers and wage skill premium increased significantly over 2003-2009 for overall industry and across the region. An analysis based on demand-supply framework suggests that demand shifts favoring skilled workers during the period. The decomposition of labor demand shifts shows that they were driven not only by reallocation of labor forces between industries but also by change within industries, particularly among formal workers, suggesting evidence of skill-biased technological changes. The empirical evidence from the data of manufacturing firms suggest that diffusion of new technologies through imported materials and foreign direct investment caused greater demand for skilled labor and higher wage inequality in the manufacturing sector.

Changes in Skill Wage Premium: Facts and Factors

Changes in Skill Wage Premium: Facts and Factors

Non-scale endogenous growth effects of subsidies for exporters

We built a general equilibrium endogenous growth model in which final goods are produced either in the relatively skilled-labour intensive exports sector or in the relatively unskilled-labour intensive domestic sector. We show that, by affecting the technological-knowledge bias, subsidies explain the simultaneous rise in the exports sector, the skill wage premium and the economic growth rate. Then, to shed light upon the causal nexus between production-related subsidies and exports, we use a Portuguese longitudinal database (1996–2003) and implement a propensity score matching approach. Empirical results seem to prove the theoretical predictions: subsidies generate the rise in the wage premium of exporters and the increase in the relative size of export sector, even if no impact of subsidies is found in the capacity of transforming domestic firms into new exporters.

Trade Liberalization and the Wage Skill Premium: Evidence from Indonesia

In this paper, we analyze the effect of reducing import tariffs on intermediate inputs and final goods on the wage skill premium within firms in Indonesia – a country with a high share of unskilled workers. We present a new finding that reducing input tariffs reduces the wage skill premium within firms that import their intermediate inputs. However, we do not find significant effects from reducing tariffs on final goods on the wage skill premium within firms.

Labor Heterogeneity and the Risk of Expropriation in Less Developed Countries

Following the notion of skill-biased FDI flows from developed to less developed regions, high-skilled workers are likely to benefit from FDI to a larger extent. They earn a productivity advantage that potentially transfers into a skilled wage premium. This gives rise to distributional conflict that might turn into heterogeneous attitudes toward FDI inflows in line with skill. In this paper I study the effect of less developed countries’ skill compositions on the risk of expropriation. Not surprisingly, it turns out that the risk of expropriation decreases with a larger employment share of high-skilled workers. However, in a theoretical model, the effect is diminishing and even turns negative in the empirical investigation: if the relative supply of high-skilled labor is too large, the skilled wage premium turns negative despite the skill-bias of FDI. Then, high-skilled workers’ positive attitudes toward FDI vanish.

Supply of skilled labour and organizational change

The paper develops a model where the structure of organizations is a choice variable for firms and depends on conditions in the labour market. It shows that an increase in the supply of skilled labour may lead firms to adopt organizations with less hierarchical levels. This organizational change increases firms' demand for skilled agents and qualitatively modifies their jobs ( i.e. the set of tasks assigned to skilled employees) thus increasing the skilled wage premium.

Is the growing skill premium a purely metropolitan issue?

This paper documents that virtually all of the growth in the skilled wage premium over the 1980s in the United States was confined to metropolitan areas. Explanations for the growing skilled premium will therefore need to take location into account.

The Impact of Exporting and Export Destination on Manufacturing Wages: Evidence for Sub‐Saharan Africa

AbstractThis paper investigates wage effects of trade status of African firms. Using data for manufacturing firms, we find a positive overall association between individual earnings and export status. Moreover, the skill wage premium in exporting firms is significantly higher. These results are consistent with either trade inducing higher wages in the exporting country, or with more productive (higher wage) firms self‐selecting into exporting. The results are not robust, however, to disaggregation by export destination. Exporting to outside Africa generates a negative wage premium whereas exporting to African markets yields a positive premium in export firms of the exporting country. This suggests that there is a disciplining effect on the wages of exporting firms only when exporting is to more competitive markets.

What Explains the Widening Wage Gap? Outsourcing vs. Technology

The relative rise of wages for high-skilled workers over the last three decades has been the subject of intense academic and popular scrutiny. This paper develops a new methodology for decomposing wage changes into three sources: outsourcing, biased technological change, and total biased technological change. We find that for the 1980-1999 period the change in outsourcing accounts for between 28 and 36 percent of the observed wage change, and biased technological change for another 15-19 percent in the US. Jointly these two forces (total biased technological change) explain 58 percent of the wage change. In sum, we find that outsourcing and biased technological change can account for a large share of the observed divergence in the skilled wage premium.

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

Abstract: The factors behind the increase in the relative wages of skilled workers in developing countries are still not well understood. The authors use data from Peru to analyze the determinants of within-industry share of skilled workers. They 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. The authors 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. JEL classification: F16, J31, O12, O54, E22 Key words: skill premium, capital-skill complementarity, capital accumulation, Peru Introduction Many developing countries have experienced an increase in the relative wages of skilled workers following trade liberalization, as has been well documented by now (see, for example, Robbins 1996, Wood 1997, and 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. (1) The fact that the rise in the skill premium has been observed in developing countries as well has also been interpreted as an additional piece of evidence to support the claim that it is technology rather than trade that is driving the rise in relative wages in the industrialized world (Berman and Machin 2000). A common way to demonstrate that skilled biased technological change has taken place is to show that the share of skilled workers in the wage bill within industries has increased over time (Berman, Bound, and Griliches 1994 and Berman and Machin 2000). If the overall wage share of skilled workers in the economy is increasing due to trade, then one would expect to see that reallocations of labor between industries (from those with a low wage share of skilled workers to those with higher wage shares) driving this shift. On the other hand, if technology were the culprit, then these shares would be changing in the favor of skilled workers within industries. The papers cited above find that most the changes can be explained by within-industry changes. (2) Changes in the wage share of skilled labor within industries can be a good measure of shifts in relative demand. An increase in the wage share of skilled labor in the face of a rising skilled wage premium will indicate a shift in favor of this type of labor if we assume that the elasticity of substitution is greater than 1. The literature cited in the previous paragraph has attributed these wage share changes to technology. However, within-industry changes in the share can be driven by factors other than technology. Since technological change is not directly observable, the studies mentioned above interpret the residual component of share changes that cannot be explained by measurable factors as the effects of technology. (3) The factors other than technology that could also influence the shares of skilled and unskilled labor include capital and materials. Skilled labor could be more complementary with physical capital than unskilled labor. Griliches (1969) formalized the hypothesis for such capital-skill complementarity and provided evidence for it. Krusell et al. (2000), in fact, argue that capital-skill complementarity can explain most of the change in the share of skilled labor in the United States (a view that is contrary to the rest of the literature). It is also possible for materials to affect the share of skilled labor. For example, material imports could substitute for unskilled labor in industrialized nations, as Feenstra and Hanson (1999) point out. …

Vertical FDI Revisited

This study explores how relative skilled-wage premia affect FDI. Contrary to previous studies based on factor endowment differences, we find strong support for vertical FDI, in the sense that more FDI is conducted in countries where unskilled labor is relatively cheap. In addition, we find that relative skill-premia also affect FDI activities that have previously been associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential effects of changes in the relative wage costs on international production reallocation within MNEs are large. In fact, if not for the 8% rise in the US skilled wage premium relative to the average host country between 1986- 1994, annual US affliate sales abroad in relation to US GDP would have been half a percentage point higher.

Skill-Biased Transition: The Role of Markets, Institutions, and Technological Change

This study attempts to explain why the transition to a market economy is skill-biased. It shows unequivocal evidence on increased skill wage premium and supply of skills in transition economies. It examines whether similar skill-favoring shifts in the Russian and U.S. economies are driven by the same set of factors. Our analysis elaborates on the model of alternative theories of the increased wage skill premium and then evaluates three main hypotheses: skill-biased technological change, the market adjustment hypothesis, and the institutional factor hypothesis. To test these hypotheses, the study uses unique linked employer-employee data that spans the 16 years of the Soviet and transition periods in Russia (1985-2000), with a special emphasis on data quality, measurement errors, and retrospective biases. The main conclusion is that there is no uni-causal and time-invariant explanation for skill-biased changes in wages and employment in the Russian economy. The increased skill wage premium has been driven mainly by institutional factors during the early period and by productivity and technological change during the late transition period, and reinforced by market adjustment of wage ratio to the true differences in labor productivity.

The U.S. Technology Frontier

In Caselli and Coleman (2000) we developed a framework that separately identifies the efficiency units embodied in unskilled labor, skilled labor, and capital in a country’s aggregate production function. Applying that framework to cross-country data, we showed that countries where unskilled labor is relatively abundant are those with the most efficient unskilled workers, while countries where skilled labor and capital are abundant are the most efficient users of these inputs. We interpreted these findings as evidence of appropriatetechnology adoption: in each country firms choose from a menu of technologies; different technologies imply different combinations of values for the efficiency units embodied in the three factors of production; in each country the technology is chosen that makes the most of the most abundant factors. In this paper we apply the same framework to time-series data from the United States over the period 1963–1992. We find that throughout this period the efficiencies of skilled labor and capital have risen. The efficiency of unskilled labor has risen in tandem with those of the other factors in the early part of the sample, but surprisingly, it has been falling since sometime in the 1970’s (the exact turning point depends somewhat on some parametric assumptions). In analogy with the cross-country evidence, these changes are closely associated with changes in the relative abundance of skilled labor and capital, which increased rather dramatically. In this sense, the recent history of technologies in use by U.S. firms may mimic the choice of technologies around the world today: as skills and capital become more abundant, technologies are chosen that maximize the efficiency of these inputs. As we discuss below, however, in the U.S. context the converse story (relative labor supplies adjusting to exogenous changes in technology) is also consistent with the data. Besides its relevance to models of technology adoption, this evidence also sheds new light on the widely documented recent increase in the skilled wage premium in the United States. Lawrence F. Katz and Kevin M. Murphy (1992) and David H. Autor et al. (1998) used the relative wage and the relative labor supply series to show that the efficiency of unskilled labor relative to skilled labor must have declined over time. Our framework allows us to go further and show that, indeed, the absolute efficiency of unskilled labor has fallen (after 1970), while the efficiency of skilled labor and capital have increased. A similar result was obtained with different techniques by Marta Ruiz Arranz (2001).

A Picture of Wage Inequality and the Allocation of Labor Through a Period of Trade Liberalization: The Case of Brazil

This paper constructs a picture of the labor market impact of trade liberalization in Brazil. We examine the level and dispersion of wages, the skilled wage premium, and employment composition before and after trade liberalization. After trade reform, there was a rise in the returns to college education which, since the share of college workers also rose, is attributable to rising demand. This change did not increase overall wage dispersion because of the small share of college-educated workers and because of decreasing returns to intermediate levels of education.

Quasi-specific factors: worker comparative advantage in the two-sector production model

This paper integrates the Heckscher–Ohlin, specific factors, and the Ricardian models of production with applications to international trade and labor economics. The model economy exhibits both Heckscher–Ohlin and specific factors properties, but never at the same time. In international trade, the wage skill premium across countries can move in different directions and has natural limits within countries. In labor economics, we show that the earning of economic rents is not inconsistent with competitive markets in general equilibrium and that process and skill-based innovations have contrasting effects on wage inequality.

A Welfare Analysis of Policy Responses to the Skilled Wage Premium

I build a model with heterogeneous agents which is consistent both with rising wage inequality across education levels and with an increasing relative number of college graduates. I use the model to investigate the welfare implications of policies which influence the structure of net wages. Each policy affects agents directly through taxes and subsides and indirectly as wages respond to changes in the relative supply of skilled and unskilled workers. I find that as wage inequality grows due to skill-biased technological change, policies which promote a more egalitarian wage structure can become increasingly acceptable to all agents and that for nearly all agents, education subsidies may be preferred to direct transfers as a means of decreasing wage inequality. Journal of Economic Literature Classification Numbers: E60, I28, H52.

Small Firms, Contracting‐out, Computers and Wage Inequality: Evidence from UK Manufacturing

What demand‐side and institutional factors raised the skilled wage premium over the 1980s in UK manufacturing? Using a panel of 80 industries over 1980–9, we find that (1) the average skill premium rose by around 13 percentage points; (2) computer introduction explains around 50% of thisrise; (3) the growth in small firms and in contracting‐out together explain around 20% of the rise; and (4) the fall in unionization explains around 15% of the rise.

The Skilled Wage Premium and the Growth of Small Firms in UK Manufacturing

We document the role of small firms in explaining the growth of the skilled/unskilled wage premium in UK manufacturing over the 1980s. Our major findings are (i) the share of manufacturing employment in small firms' (0–99) employees has risen by 35 percent over this period; (ii) small firms pay more unequal wages than do large firms: the non‐manual/manual wage premium is 1.53 in small firms and 1.50 in firms of over 1,500 workers; (iii) the growth in small firms over the period explains about 20 percent of the rise in the skilled/unskilled wage premium.