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Capital-skill complementarity in manufacturing: Lessons from the US shale boom

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  • Hernandez Martinez, Victor

Abstract

This paper tests the existence of capital-skill complementarity in the manufacturing sector using quasi-experimental increases in the relative price of low-skill labor induced by the US shale boom. I find that in response to the shale boom, local manufacturing firms decreased their relative usage of low-skill labor while increasing their capital expenditures. These endogenous changes in the input mix allowed manufacturers to maintain the value added despite the increase in the price of low-skill labor, avoiding the potential short-term crowding-out effects of the natural resource boom. These findings perfectly match the predictions from a nested CES manufacturing production function where capital and low-skill labor are nested together, and their elasticity of substitution exceeds that between capital and high-skill labor. Alternative production functions yield predictions that are inconsistent with the data or hard to reconcile with the previous literature.

Suggested Citation

  • Hernandez Martinez, Victor, 2025. "Capital-skill complementarity in manufacturing: Lessons from the US shale boom," European Economic Review, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:eecrev:v:178:y:2025:i:c:s0014292125001229
    DOI: 10.1016/j.euroecorev.2025.105072
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    Keywords

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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