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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)

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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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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  5. Acemoglu, Daron, 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," CEPR Discussion Papers 1707, C.E.P.R. Discussion Papers.
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  8. Aghion, Philippe, 2002. "Schumpeterian Growth Theory and the Dynamics of Income Inequality," Scholarly Articles 3350067, Harvard University Department of Economics.
  9. Rosario Crinò, 2005. "Wages, Skills, and Integration in Poland, Hungary and the Czech Republic: an Industry-level Analysis," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 12(3), pages 432-459, December.
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  20. Hui He & Zheng Liu, 2007. "Investment-specific technological change, skill accumulation, and wage inequality," Working Papers 644, Federal Reserve Bank of Minneapolis.
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  25. Afonso, Oscar, 2008. "The impact of government intervention on wage inequality without scale effects," Economic Modelling, Elsevier, vol. 25(2), pages 351-362, March.
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