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The elasticity of substitution between skilled and unskilled labor in developing countries: A directed technical change perspective

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  • Behar, Alberto

Abstract

I develop a model of endogenous skill-biased technical change in developing countries. The endogenous response to a rise in skill supply counters the traditional substitution effect and dampens supply’s role in reducing wage inequality. The model reinforces consensus estimates of the elasticity of substitution between more/less educated workers by reconciling dispersed existing estimates. It also rationalizes estimates that were hitherto deemed implausible or theory-inconsistent. I produce new estimates for developing countries with a new global panel and with Latin American data (that facilitates analysis of dynamics). Many estimated elasticity values are almost 2. This sheds new light on a parameter that is crucial for inequality, growth, and other key macroeconomic questions.

Suggested Citation

  • Behar, Alberto, 2025. "The elasticity of substitution between skilled and unskilled labor in developing countries: A directed technical change perspective," Journal of Development Economics, Elsevier, vol. 174(C).
    • Handle: RePEc:eee:deveco:v:174:y:2025:i:c:s0304387824001603
    DOI: 10.1016/j.jdeveco.2024.103411
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    More about this item

    Keywords

    Skill-biased technical change; Elasticity of substitution; Skill premium; Inequality; Growth accounting;
    All these keywords.

    JEL classification:

    • I20 - Health, Education, and Welfare - - Education - - - General
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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