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Skill premium divergence: the roles of trade, capital and demographics

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  • Sang-Wook Stanley Cho

    (UNSW Business School, University of New South Wales)

  • Julián P. Díaz

    (Loyola University Chicago)

Abstract

We construct an applied general equilibrium model to account for diverging patterns of the skill premium. Our framework assesses the roles of various factors that affect the demand and supply of skilled and unskilled labor—shifts in the skill composition of the labor supply, changes in the terms of trade and the complementarity between skilled labor and equipment capital in production. We find that increases in relative skilled labor supply due to demographic changes lead to a decline in the skill premium, while equipment capital deepening raises the relative demand for skilled labor, which in turn increases the skill premium. In addition, terms of trade changes lead to the reallocation of resources toward sectors in which countries enjoy comparative advantages. Since our model incorporates multiple factors simultaneously, it can generate either rising or falling skill premium paths. When we parametrize the model to the Baltic states—countries that were similar along many dimensions at the onset of their transition from centrally planned to market-oriented economies—our model can closely account for the diverging patterns of skill premia observed in the Baltics between 1995 and 2008.

Suggested Citation

  • Sang-Wook Stanley Cho & Julián P. Díaz, 2019. "Skill premium divergence: the roles of trade, capital and demographics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(1), pages 249-283, February.
    • Handle: RePEc:spr:joecth:v:67:y:2019:i:1:d:10.1007_s00199-018-1098-8
    DOI: 10.1007/s00199-018-1098-8
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    Cited by:

    1. P. M. Picard & A. Tampieri, 2021. "Vertical differentiation and trade among symmetric countries," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1319-1355, June.
    2. Mr. Gee Hee Hong & Zsoka Koczan & Weicheng Lian & Mr. Malhar S Nabar, 2018. "More Slack than Meets the Eye? Recent Wage Dynamics in Advanced Economies," IMF Working Papers 2018/050, International Monetary Fund.

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    More about this item

    Keywords

    Skill premium; International trade; Capital-skill complementarity; Demographic change; Baltic states;
    All these keywords.

    JEL classification:

    • E16 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Social Accounting Matrix
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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