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The decline in capital-skill complementarity

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  • Castex, Gonzalo
  • (Stanley) Cho, Sang-Wook
  • Dechter, Evgenia

Abstract

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.

Suggested Citation

  • Castex, Gonzalo & (Stanley) Cho, Sang-Wook & Dechter, Evgenia, 2022. "The decline in capital-skill complementarity," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:dyncon:v:138:y:2022:i:c:s0165188922000689
    DOI: 10.1016/j.jedc.2022.104363
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Decline in Capital-Skill Complementarity
      by Christian Zimmermann in NEP-DGE blog on 2021-10-14 04:34:05

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    More about this item

    Keywords

    Capital-skill complementarity; Technological change; Skill premium; Labor share;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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