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Substitution and Complementarity under Comparative Advantage and the Accumulation of Human Capital

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  • Coen N. Teulings

    ()
    (SEO, University of Amsterdam)

Abstract

The paper applies Ricardo's principle of comparative advantage to analyze the substitutability between types of labor. The problem of having to classify labor in a small number of types in e.g. standard CES models are avoided by applying a continuum of worker and job types, where better skilled workers have a comparative advantage in more complex jobs. The complementarity matrix,which is derived by inverting the substitution matrix, exhibits attractive features. The matrix depends only on the wage distribution and a single parameter, which is dubbed the complexity dispersion parameter.A particularly intriguing application is the accumulation of human capital. Aninvestment in human capital reduces the supply of low-skilled and increases thesupply of highly skilled workers, therefore compressing wage differentials. The training of one skill group will therefore have (positive and negative) externalities to the wage of other skill groups. The complexity dispersion parameter measures the percentage compression in log wage differentials per percent accumulation of human capital. Empirical estimates suggest that this parameter is in the range of 2.4 - 3.8. This mechanism explainsfor example the massive compression of wage differentials in some Asian tigersduring the seventies and the eighties. The inverse of the complexity dispersion parameter measures the maximum productivity gain that can be achieved by human capital accumulation.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 99-049/3.

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Date of creation: 01 Jul 1999
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Handle: RePEc:dgr:uvatin:19990049

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  1. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, Econometric Society, vol. 43(3), pages 455-68, May.
  2. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  3. Coen N. Teulings, 0000. "Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox," Tinbergen Institute Discussion Papers, Tinbergen Institute 98-118/3, Tinbergen Institute.
  4. Edwin Leuven & Hessel Oosterbeek & Hans van Ophem, 1997. "International Comparisons of Male Wage Inequality: Are the Findings Robust?," Tinbergen Institute Discussion Papers, Tinbergen Institute 97-059/3, Tinbergen Institute.
  5. Shimer, R. & Smith, L., 1998. "Assortive Matching and Search," Papers, Michigan - Center for Research on Economic & Social Theory 98-09, Michigan - Center for Research on Economic & Social Theory.
  6. Teulings, Coen N, 1995. "The Wage Distribution in a Model of the Assignment of Skills to Jobs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(2), pages 280-315, April.
  7. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
  8. Coen N. Teulings & José A.C. Vieira, 1998. "Urban versus Rural Return to Human Capital in Portugal, A Cook-Book Recipe for Applying Assignment Models," Tinbergen Institute Discussion Papers, Tinbergen Institute 98-095/3, Tinbergen Institute, revised 20 Sep 2002.
  9. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "General Equilibrium Treatment Effects: A Study of Tuition Policy," NBER Working Papers 6426, National Bureau of Economic Research, Inc.
  10. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 20(2), pages 487-528, June.
  11. Topel, Robert H, 1994. "Regional Labor Markets and the Determinants of Wage Inequality," American Economic Review, American Economic Association, American Economic Association, vol. 84(2), pages 17-22, May.
  12. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 410-42, June.
  13. David Card & Alan Krueger, 1993. "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 694, Princeton University, Department of Economics, Industrial Relations Section..
  14. Coen N. Teulings, 1998. "The Contribution of Minimum Wages to Increasing Wage Inequality," Tinbergen Institute Discussion Papers, Tinbergen Institute 98-093/3, Tinbergen Institute.
  15. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
  16. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 31(2), pages 831-80, June.
  17. John M. Abowd & Richard B. Freeman, 1991. "Immigration, Trade and the Labor Market," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number abow91-1.
  18. Young, Alwyn, 1995. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 641-80, August.
  19. Claudia Goldin & Robert A. Margo, 1991. "The Great Compression: The Wage Structure in the United States at Mid- Century," NBER Working Papers 3817, National Bureau of Economic Research, Inc.
  20. Birdsall, Nancy & Ross, David & Sabot, Richard, 1995. "Inequality and Growth Reconsidered: Lessons from East Asia," World Bank Economic Review, World Bank Group, World Bank Group, vol. 9(3), pages 477-508, September.
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Cited by:
  1. Coen N. Teulings, 1998. "The Contribution of Minimum Wages to Increasing Wage Inequality," Tinbergen Institute Discussion Papers, Tinbergen Institute 98-093/3, Tinbergen Institute.

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