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Costly Investment, Complementarities and the Skill Premium

  • Óscar Afonso

    ()

    (CEFUP, OBEGEF, Faculdade de Economia, Universidade do Porto)

  • Maria Thompson

    ()

    (NIPE, Escola de Economia e Gestão, Universidade do Minho)

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    We propose a new framework to analyse the wage premium behaviour. Building on Acemoglu and Zilibotti (2001), we introduce physical capital and two assumptions: (i) internal costly investment in both capital and R&D; (ii) complementarities between capital goods in production. We find that, for economies relatively abundant in high-skilled labour, a rise in the relative endowment of high-skilled labour is accompanied by a rise in the skill premium. We further find that a rise (i) in investment costs or (ii) in the complementarities degree, requires an increase in the relative endowment of high-skilled labour, for the economy to remain in the same growth equilibrium. For economies relatively abundant in high-skilled labour, such rises are also accompanied by an increase in the skill premium.

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    File URL: http://www.fep.up.pt/investigacao/workingpapers/09.04.28_wp323.pdf
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    Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 323.

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    Length: 18 pages
    Date of creation: Apr 2009
    Date of revision:
    Handle: RePEc:por:fepwps:323
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    1. Bound, John & Johnson, George, 1992. "Changes in the Structure of Wages in the 1980's: An Evaluation of Alternative Explanations," American Economic Review, American Economic Association, vol. 82(3), pages 371-92, June.
    2. Kiminiori Matsuyama, 1994. "Complementaries and Cumulative Processes In Models of Monopolistic Competition," Discussion Papers 1106, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Katz, Lawrence F & Murphy, Kevin M, 1992. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 35-78, February.
    4. Acemoglu, Daron & Zilibotti, Fabrizio, 1998. "Productivity Differences," Seminar Papers 660, Stockholm University, Institute for International Economic Studies.
    5. Oscar Afonso, 2006. "Skill-biased technological knowledge without scale effects," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 13-21.
    6. Zhu, Susan Chun & Trefler, Daniel, 2005. "Trade and inequality in developing countries: a general equilibrium analysis," Journal of International Economics, Elsevier, vol. 65(1), pages 21-48, January.
    7. Daron Acemoglu, 2001. "Directed Technical Change," NBER Working Papers 8287, National Bureau of Economic Research, Inc.
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    9. Daniel Fernandez Kranz, 2006. "Why has wage inequality increased more in the USA than in Europe? An empirical investigation of the demand and supply of skill," Applied Economics, Taylor & Francis Journals, vol. 38(7), pages 771-788.
    10. Acemoglu, D., 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," Working papers 97-14, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Hui He & Zheng Liu, 2007. "Investment-specific technological change, skill accumulation, and wage inequality," Working Papers 644, Federal Reserve Bank of Minneapolis.
    12. Maria Thompson, 2008. "Complementarities and costly investment in a growth model," Journal of Economics, Springer, vol. 94(3), pages 231-240, September.
    13. Robertson, Raymond, 2004. "Relative prices and wage inequality: evidence from Mexico," Journal of International Economics, Elsevier, vol. 64(2), pages 387-409, December.
    14. Rivera-Batiz, Luis A & Romer, Paul M, 1991. "Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 531-55, May.
    15. J. David Richardson, 1995. "Income Inequality and Trade: How to Think, What to Conclude," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 33-55, Summer.
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    17. Benavie, Arthur & Grinols, Earl & Turnovsky, Stephen J., 1996. "Adjustment costs and investment in a stochastic endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 77-100, August.
    18. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
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