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Capital-Skill Complementarity and Inequality in Swedish Industry

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Abstract

Income inequality has been increasing in Sweden for more than two decades. Since 1981, the skill premium has risen by 20 percent for the economy as a whole and by as much as 30 percent for men working in the private sector. At the same time, the supply of skilled workers has grown by 20 percent. Given this increase in the supply of skilled labor, why has Sweden experienced such a prolonged increase in income inequality between skilled and unskilled workers? This question is examined here in a neoclassical growth framework using data from Swedish industry. The main finding of this study is that the rise in income inequality in Swedish industry is being driven by capital-skill complementarity. Increased investments in new capital equipment, together with a higher rate of capital utilization and a slowdown in the growth rate of skilled labor, have raised the ratio of effective capital inputs per skilled worker, which, in turn, has increased the relative demand for skilled labor through the capital-skill complementarity mechanism.

Suggested Citation

  • Lindquist, Matthew, 2001. "Capital-Skill Complementarity and Inequality in Swedish Industry," Research Papers in Economics 2001:2, Stockholm University, Department of Economics, revised 05 Mar 2003.
  • Handle: RePEc:hhs:sunrpe:2001_0002
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    File URL: http://www2.ne.su.se/paper/wp01_02.pdf
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    Cited by:

    1. Carlén, Björn, 2002. "Exclusionary Manipulation of Carbon Permit Markets: A Laboratory Test," Research Papers in Economics 2002:15, Stockholm University, Department of Economics.
    2. Michael Ben-Gad, 2008. "Capital-Skill Complementarity and the Immigration Surplus," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 335-365, April.
    3. Matthew J. Lindquist, 2005. "Capital-Skill Complementarity and Inequality in Sweden," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 711-735, December.
    4. Matthew J. Lindquist, 2004. "Capital-Skill Complementarity and Inequality Over the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 519-540, July.

    More about this item

    Keywords

    capital-skill complementarity; skill premium; wage inequality;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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