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Rejecting Capital-Skill Complementarity at all Costs

  • Frondel, Manuel

    ()

    (RWI)

  • Schmidt, Christoph M.

    ()

    (RWI)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 316.

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Length: 32 pages
Date of creation: Jun 2001
Date of revision:
Publication status: published in: Economics Letters, 2003, 80 (1), 5-21
Handle: RePEc:iza:izadps:dp316
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  1. Turnovsky, Michelle H L & Donnelly, William A, 1984. "Energy Substitution, Separability, and Technical Progress in the Australian Iron and Steel Industry," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(1), pages 54-63, January.
  2. Berger, Mark C., 1984. "Increases in energy prices, costs of production, and plant size," Journal of Economics and Business, Elsevier, vol. 36(3), pages 345-357, August.
  3. Ryan, David L. & Wales, Terence J., 2000. "Imposing local concavity in the translog and generalized Leontief cost functions," Economics Letters, Elsevier, vol. 67(3), pages 253-260, June.
  4. Berndt, Ernst R. & Morrisson, Catherine J., 1979. "Income redistribution and employment effects of rising energy prices," Resources and Energy, Elsevier, vol. 2(2-3), pages 131-150.
  5. Felix Fitzroy & Michael Funke, 1998. "Skills, Wages and Employment in East and West Germany," Regional Studies, Taylor & Francis Journals, vol. 32(5), pages 459-467.
  6. Denny, Michael & Fuss, Melvyn A, 1977. "The Use of Approximation Analysis to Test for Separability and the Existence of Consistent Aggregates," American Economic Review, American Economic Association, vol. 67(3), pages 404-18, June.
  7. Freeman, Richard B & Medoff, James L, 1982. "Substitution between Production Labor and Other Inputs in Unionized and Nonunionized Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 220-33, May.
  8. Kumbhakar, Subal C., 1997. "Modeling allocative inefficiency in a translog cost function and cost share equations: An exact relationship," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 351-356.
  9. Berndt, Ernst R & Christensen, Laurits R, 1974. "Testing for the Existence of a Consistent Aggregate Index of Labor Inputs," American Economic Review, American Economic Association, vol. 64(3), pages 391-404, June.
  10. 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.
  11. Manuel Frondel & Christoph M. Schmidt, 2002. "The Capital-Energy Controversy: An Artifact of Cost Shares?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 53-79.
  12. Lutz Bellmann & Stefan Bender & Thorsten Schank, 1999. "Flexibility of Firms' Labor Demand: Substitutability or Complementarity," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 219(1+2), pages 109-126, July.
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