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Rejecting capital-skill complementarity at all costs

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Frondel, Manuel
Schmidt, Christoph M.

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Abstract

Any serious empirical study of factor substitutability has to allow the data to display complementarity as well as substitutability. The standard approach reflecting this idea is a translog specification – this is also the approach used by numerous studies analyzing the relative capital-skill complementarity hypothesis formulated by GRILICHES (1969). According to this hypothesis, the degree of substitutability between skilled labor and capital is lower than that for unskilled labor and capital. Yet, the results of empirical studies investigating this hypothesis are controversial. This paper offers a straightforward explanation: Using a translog approach reduces the issue of factor substitutability or complementarity to a question of cost shares. Our review of translog studies mentioned in HAMERMESH’s (1993) summary on the demand for heterogeneous labor demonstrates that this argument is empirically relevant – all these studies can be reconciled with each other on the basis of the cost-share argument.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 01-27.

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Date of creation: 2001
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Handle: RePEc:zbw:zewdip:5382

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Keywords: Substitutability Translog Cost Function

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Find related papers by JEL classification:
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
D2 - Microeconomics - - Production and Organizations

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  1. Bergstrom, Villy & Panas, Epaminondas E, 1992. "How Robust Is the Capital-Skill Complementarity Hypothesis?," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 540-46, August. [Downloadable!] (restricted)
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(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. Eva, MORENO GALBIS, . "Changes in the skill structure of the labour force. An empirical application to the Spanish case," Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper 2002035, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  2. Manuel Frondel & Christoph M. Schmidt, 2006. "On the Restrictiveness of Separability: The Significance of Energy in German Manufacturing," RWI Discussion Papers 0038, Rheinisch-Westfälisches Institut für Wirtschaftsforschung. [Downloadable!]
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