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What Drives the Skill Premium: Technological Change or Demographic Variation?

  • Hui He

    ()

    (Department of Economics, University of Hawaii at Manoa)

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This paper quantitatively examines the effects of two exogenous driving forces, investment-specific technological change (ISTC) and the demographic change known as “the baby boom and the baby bust,” on the evolution of the skill premium in the postwar U.S. economy. I develop an overlapping generations general equilibrium model with endogenous discrete schooling choice. The production technology features capital-skill complementarity as in Krusell et al. (2000). ISTC, through capital-skill complementarity, raises the relative demand for skilled labor, while demographic variation affects the skill premium through changing the age structure and hence relative supply of skilled labor. I find that demographic change is more important in shaping the skill premium before 1980. Since then, ISTC takes over to drive the dramatic increase in the skill premium.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_09-11.pdf
File Function: First version, 2009
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Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200911.

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Length: 40 pages
Date of creation: 01 Mar 2009
Date of revision:
Handle: RePEc:hai:wpaper:200911
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