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Costly Investment, Complementarities and the Skill Premium

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  • Óscar Afonso

    ()
    (CEFUP, OBEGEF, Faculdade de Economia, Universidade do Porto)

  • Maria Thompson

    ()
    (NIPE, Escola de Economia e Gestão, Universidade do Minho)

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    Abstract

    We propose a new framework to analyse the wage premium behaviour. Building on Acemoglu and Zilibotti (2001), we introduce physical capital and two assumptions: (i) internal costly investment in both capital and R&D; (ii) complementarities between capital goods in production. We find that, for economies relatively abundant in high-skilled labour, a rise in the relative endowment of high-skilled labour is accompanied by a rise in the skill premium. We further find that a rise (i) in investment costs or (ii) in the complementarities degree, requires an increase in the relative endowment of high-skilled labour, for the economy to remain in the same growth equilibrium. For economies relatively abundant in high-skilled labour, such rises are also accompanied by an increase in the skill premium.

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    File URL: http://www.fep.up.pt/investigacao/workingpapers/09.04.28_wp323.pdf
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    Bibliographic Info

    Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 323.

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    Length: 18 pages
    Date of creation: Apr 2009
    Date of revision:
    Handle: RePEc:por:fepwps:323

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    Related research

    Keywords: R&D; Technological-Knowledge Bias; Wage Inequality; Complementarities; Costly Investment;

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    References

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    1. Kiminiori Matsuyama, 1994. "Complementaries and Cumulative Processes In Models of Monopolistic Competition," Discussion Papers 1106, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Daron Acemoglu, 2002. "Directed Technical Change," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 781-809.
    3. Hui He & Zheng Liu, 2007. "Investment-specific technological change, skill accumulation, and wage inequality," Working Papers 644, Federal Reserve Bank of Minneapolis.
    4. Daron Acemoglu & Fabrizio Zilibotti, 2001. "Productivity Differences," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 563-606, May.
    5. Benavie, Arthur & Grinols, Earl & Turnovsky, Stephen J., 1996. "Adjustment costs and investment in a stochastic endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 77-100, August.
    6. Rivera-Batiz, Luis A & Romer, Paul M, 1991. "Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 531-55, May.
    7. Katz, L.F. & Murphy, K.M., 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," Harvard Institute of Economic Research Working Papers 1580, Harvard - Institute of Economic Research.
    8. Evans, Geroge W & Honkapohja, Seppo & Romer, Paul, 1998. "Growth Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 495-515, June.
    9. Daniel Fernandez Kranz, 2006. "Why has wage inequality increased more in the USA than in Europe? An empirical investigation of the demand and supply of skill," Applied Economics, Taylor & Francis Journals, vol. 38(7), pages 771-788.
    10. J. David Richardson, 1995. "Income Inequality and Trade: How to Think, What to Conclude," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 33-55, Summer.
    11. Acemoglu, D., 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," Working papers 97-14, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. Zhu, Susan Chun & Trefler, Daniel, 2005. "Trade and inequality in developing countries: a general equilibrium analysis," Journal of International Economics, Elsevier, vol. 65(1), pages 21-48, January.
    13. Rosario Crinò, 2005. "Wages, Skills, and Integration in Poland, Hungary and the Czech Republic: an Industry-level Analysis," Transition Studies Review, Springer, vol. 12(3), pages 432-459, December.
    14. Oscar Afonso, 2006. "Skill-biased technological knowledge without scale effects," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 13-21.
    15. Robertson, Raymond, 2004. "Relative prices and wage inequality: evidence from Mexico," Journal of International Economics, Elsevier, vol. 64(2), pages 387-409, December.
    16. 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, vol. 101(3), pages 410-42, June.
    17. Bound, John & Johnson, George, 1992. "Changes in the Structure of Wages in the 1980's: An Evaluation of Alternative Explanations," American Economic Review, American Economic Association, vol. 82(3), pages 371-92, June.
    18. Maria Thompson, 2008. "Complementarities and costly investment in a growth model," Journal of Economics, Springer, vol. 94(3), pages 231-240, September.
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