Econometrica: Sep 2000, Volume 68, Issue 5

Capital‐skill Complementarity and Inequality: A Macroeconomic Analysis

https://doi.org/10.1111/1468-0262.00150
p. 1029-1053

Per Krusell, Lee E. Ohanian, José‐Víctor Ríos‐Rull, Giovanni L. Violante

The supply and price of skilled labor relative to unskilled labor have changed dramatically over the postwar period. The relative quantity of skilled labor has increased substantially, and the , which is the wage of skilled labor relative to that of unskilled labor, has grown significantly since 1980. Many studies have found that accounting for the increase in the skill premium on the basis of observable variables is difficult and have concluded implicitly that latent must be the main factor responsible. This paper examines that view systematically. We develop a framework that provides a simple, explicit economic mechanism for understanding skill‐biased technological change in terms of observable variables, and we use the framework to evaluate the fraction of variation in the skill premium that can be accounted for by changes in observed factor quantities. We find that with capital‐skill complementarity, changes in observed inputs alone can account for most of the variations in the skill premium over the last 30 years.

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