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Capital-Skill Complementarity and Inequality Over the Business Cycle

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Author Info
Lindquist, Matthew J. () (Dept. of Economics, Stockholm University)

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Abstract

This study investigates the implications of capital-skill complementarity

for the cyclical behavior of wage inequality. This is done in a dynamic general equilibrium model which extends the standard real business cycle model in three ways. First, the representative agent is replaced by two agent types, skilled and unskilled. Second, the standard, two-factor Cobb-Douglas production function is replaced by a more general, four-factor production function which allows for capital-skill complementarity. Third, the model includes both neutral and investment-specific technological change. The model successfully accounts for both the volatility and the cyclical behavior of the skill premium in the United States. The results of this study suggest that capital-skill complementarity may be an important determinant of wage inequality over the business cycle.

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Publisher Info
Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2002:14.

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Length: 33 pages
Date of creation: 16 Jul 2002
Date of revision: 01 Sep 2003
Publication status: Published in Review of Economic Dynamics, 2004, pages 519-540.
Handle: RePEc:hhs:sunrpe:2002_0014

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
Phone: +46 8 16 20 00
Fax: +46 8 16 14 25
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Web page: http://www.ne.su.se/
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Related research
Keywords: business cycle; capital-skill complementarity; inequality; skill premium;

Other versions of this item:

Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lindquist, Matthew, 2001. "Capital-Skill Complementarity and Inequality in Swedish Industry," Research Papers in Economics 2001:2, Stockholm University, Department of Economics, revised 05 Mar 2003. [Downloadable!]
  2. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  3. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September. [Downloadable!] (restricted)
  4. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November. [Downloadable!] (restricted)
  5. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers 449, University of Rochester - Center for Economic Research (RCER).
    Other versions:
  6. Robert J. Gordon, 1989. "The Postwar Evolution of Computer Prices," NBER Working Papers 2227, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January. [Downloadable!] (restricted)
  9. Dougherty, C R S, 1972. "Estimates of Labor Aggregation Functions," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1101-19, Nov.-Dec.. [Downloadable!] (restricted)
  10. Francesco Caselli, 1999. "Technological Revolutions," American Economic Review, American Economic Association, vol. 89(1), pages 78-102, March. [Downloadable!] (restricted)
  11. Azariadis, Costas, 1976. "On the Incidence of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 43(1), pages 115-25, February. [Downloadable!] (restricted)
  12. Danthine, J.P. & Donaldson, J.B., 1993. "Non-Walrassian Economies," Papers 93-02, Columbia - Graduate School of Business.
  13. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1.
  14. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-62, June. [Downloadable!] (restricted)
    Other versions:
  15. Hashimoto, Masanori, 1981. "Firm-Specific Human Capital as a Shared Investment," American Economic Review, American Economic Association, vol. 71(3), pages 475-82, June. [Downloadable!] (restricted)
  16. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9. [Downloadable!] (restricted)
  17. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Oxford University Press, vol. 12(4), pages 431-59, December.
  18. Castaneda, Ana & Diaz-Gimenez, Javier & Rios-Rull, Jose-Victor, 1998. "Exploring the income distribution business cycle dynamics," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 93-130, June. [Downloadable!] (restricted)
  19. James P. Ziliak & Beth A. Wilson & Joe A. Stone, 1999. "Spatial Dynamics And Heterogeneity In The Cyclicality Of Real Wages," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 227-236, May. [Downloadable!] (restricted)
  20. Lindquist, Matthew J., 2005. "Capital-Skill Complementarity and Inequality in Sweden," Working Paper Series 2/2005, Swedish Institute for Social Research. [Downloadable!]
    Other versions:
  21. Gomme, P. & Greenwood, J., 1993. "On the Cyclical Allocation of Risk," RCER Working Papers 355, University of Rochester - Center for Economic Research (RCER).
    Other versions:
  22. David N. DeJong & Beth F. Ingram & Charles H. Whiteman, 2000. "Keynesian impulses versus Solow residuals: identifying sources of business cycle fluctuations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(3), pages 311-329. [Downloadable!]
  23. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December. [Downloadable!] (restricted)
  24. Boldrin, Michael & Horvath, Michael, 1995. "Labor Contracts and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 972-1004, October. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Linnea Polgreen & Pedro Silos, 2005. "Capital-skill complementarity and inequality: a sensitivity analysis," Working Paper 2005-20, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  2. Toshihiko Mukoyama & Aysegul Sahin, 2005. "The cost of business cycles for unskilled workers," Staff Reports 214, Federal Reserve Bank of New York. [Downloadable!]
  3. Jens Rubart, 2006. "Heterogeneous Labor, Labor Market Frictions and Employment Effects of Technological Change. Theory and Empirical Evidence for the U.S. and Europe," Darmstadt Discussion Papers in Economics 158, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
  4. Pourpourides, Panayiotis M., 2007. "Implicit Contracts and the Cyclicality of the Skill-Premium," Cardiff Economics Working Papers E2007/19, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2009. [Downloadable!]
  5. Federico S. Mandelman & Andrei Zlate, 2008. "Immigration and the macroeconomy," Working Paper 2008-25, Federal Reserve Bank of Atlanta. [Downloadable!]
  6. Lilia Maliar & Serguei Maliar, 2006. "Capital-Skill Complementarity And Steady-State Growth," Working Papers. Serie AD 2006-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  7. Carlo Devillanova & Michele Di Maio & Pietro Vertova, 2006. "Labour Mobility, Capital-Skill Complementarity and the Redistributive Effects of Trade Integration," CESPRI Working Papers 188, CESPRI, Centre for Research on Innovation and Internationalisation, Universita' Bocconi, Milano, Italy, revised Nov 2006. [Downloadable!]
  8. Stuart J. Fowler & Eric R. Young, 2004. "The Acquisition of Skills over the Life-Cycle," Working Papers 200402, Middle Tennessee State University, Department of Economics and Finance. [Downloadable!]
  9. Toshihiko Mukoyama & Aysegul Sahin, 2005. "Costs of Business Cycles for Unskilled Workers," Working Papers 05002, Concordia University, Department of Economics. [Downloadable!]
    Other versions:
  10. Lindquist, Matthew J., 2005. "Capital-Skill Complementarity and Inequality in Sweden," Working Paper Series 2/2005, Swedish Institute for Social Research. [Downloadable!]
    Other versions:
  11. Linnea Polgreen & Pedro Silos, 2006. "Crude substitution: the cyclical dynamics of oil prices and the college premium," Working Paper 2006-14, Federal Reserve Bank of Atlanta. [Downloadable!]
  12. Eva MORENO-GALBIS & Henri SNEESSENS, 2007. "Low-skilled unemployment, capital-skill complementarity and embodied technical progress," Discussion Papers (REL - Recherches Economiques de Louvain) 2007031, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
    Other versions:
  13. Manuel A. Hidalgo, 2008. "Wage Inequality in Spain, 1980-2000," Working Papers 08.08, Universidad Pablo de Olavide, Department of Economics. [Downloadable!]
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