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Capital-Skill Complementarity and Inequality Over the Business Cycle

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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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Bibliographic 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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Keywords: business cycle; capital-skill complementarity; inequality; skill premium;

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References

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