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Costly Investment, Complementarities and the Skill Premium

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Author Info
Óscar Afonso () (CEFUP, OBEGEF, Faculdade de Economia, Universidade do Porto)
Maria Thompson () (NIPE, Escola de Economia e Gestão, Universidade do Minho)
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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Publisher 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
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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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Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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  3. Maria Thompson, 2008. "Complementarities and costly investment in a growth model," Journal of Economics, Springer, vol. 94(3), pages 231-240, September. [Downloadable!] (restricted)
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