IDEAS home Printed from https://ideas.repec.org/p/por/fepwps/323.html
   My bibliography  Save this paper

Costly Investment, Complementarities and the Skill Premium

Author

Listed:
  • Óscar Afonso

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

  • Maria Thompson

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

Abstract

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.

Suggested Citation

  • Óscar Afonso & Maria Thompson, 2009. "Costly Investment, Complementarities and the Skill Premium," FEP Working Papers 323, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:323
    as

    Download full text from publisher

    File URL: http://www.fep.up.pt/investigacao/workingpapers/09.04.28_wp323.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Daron Acemoglu, 2003. "Cross-Country Inequality Trends," Economic Journal, Royal Economic Society, vol. 113(485), pages 121-149, February.
    2. Lawrence F. Katz & Kevin M. Murphy, 1992. "Changes in Relative Wages, 1963–1987: Supply and Demand Factors," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(1), pages 35-78.
    3. Kiminori Matsuyama, 1995. "Complementarities and Cumulative Processes in Models of Monopolistic Competition," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 701-729, June.
    4. Oscar Afonso, 2006. "Skill-biased technological knowledge without scale effects," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 13-21.
    5. Evans, Geroge W & Honkapohja, Seppo & Romer, Paul, 1998. "Growth Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 495-515, June.
    6. Daron Acemoglu & Fabrizio Zilibotti, 2001. "Productivity Differences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 563-606.
    7. John Bryant, 1983. "A Simple Rational Expectations Keynes-type Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(3), pages 525-528.
    8. Francisco L. Rivera-Batiz & Luis A. Rivera-Batiz, 2018. "Economic Integration and Endogenous Growth," World Scientific Book Chapters, in: Francisco L Rivera-Batiz & Luis A Rivera-Batiz (ed.), International Trade, Capital Flows and Economic Development, chapter 1, pages 3-32, World Scientific Publishing Co. Pte. Ltd..
    9. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    10. 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.
    11. Philippe Aghion, 2002. "Schumpeterian Growth Theory and the Dynamics of Income Inequality," Econometrica, Econometric Society, vol. 70(3), pages 855-882, May.
    12. Daron Acemoglu, 1998. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1055-1089.
    13. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    14. Hui He & Zheng Liu, 2008. "Investment-Specific Technological Change, Skill Accumulation, and Wage Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 314-334, April.
    15. Daron Acemoglu, 2002. "Directed Technical Change," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(4), pages 781-809.
    16. Stephen Machin & John Van Reenen, 1998. "Technology and Changes in Skill Structure: Evidence from Seven OECD Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1215-1244.
    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. 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.
    19. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-784, August.
    20. 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 410-442, June.
    21. 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.
    22. Maria Thompson, 2008. "Complementarities and costly investment in a growth model," Journal of Economics, Springer, vol. 94(3), pages 231-240, September.
    23. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1998. "Computing Inequality: Have Computers Changed the Labor Market?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1169-1213.
    24. Robertson, Raymond, 2004. "Relative prices and wage inequality: evidence from Mexico," Journal of International Economics, Elsevier, vol. 64(2), pages 387-409, December.
    25. 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.
    26. Maoz, Yishay D. & Moav, Omer, 2004. "Social Stratification, Capital–Skill Complementarity, And The Nonmonotonic Evolution Of The Education Premium," Macroeconomic Dynamics, Cambridge University Press, vol. 8(3), pages 295-309, June.
    27. 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 371-392, June.
    28. Afonso, Oscar, 2008. "The impact of government intervention on wage inequality without scale effects," Economic Modelling, Elsevier, vol. 25(2), pages 351-362, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Agenor, Pierre-Richard & Dinh, Hinh T., 2013. "Public policy and industrial transformation in the process of development," Policy Research Working Paper Series 6405, The World Bank.
    2. Afonso, Oscar, 2013. "Diffusion and directed technological knowledge, human capital and wages," Economic Modelling, Elsevier, vol. 31(C), pages 370-382.
    3. Gil, Pedro Mazeda & Afonso, Oscar & Brito, Paulo, 2019. "Economic growth, the high-tech sector, and the high skilled: Theory and quantitative implications," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 89-105.
    4. Gil, Pedro Mazeda & Gabriel, Susana & Afonso, Oscar, 2020. "Is the skills mismatch important under skill-biased technological change and imperfect substitutability between immigrants and natives?," Economic Modelling, Elsevier, vol. 84(C), pages 38-54.
    5. Pedro Mazeda Gil & Oscar Afonso & Paulo Brito, 2012. "Scale Effects, Relative Supply of Skills, Industrial Structure and Endogenous Growth," DEGIT Conference Papers c017_028, DEGIT, Dynamics, Economic Growth, and International Trade.
    6. Pedro Mazeda Gil & Oscar Afonso & Paulo B. Vasconcelos, 2015. "Skill-Structure Shocks, the Share of the High-Tech Sector and Economic Growth Dynamics," FEP Working Papers 554, Universidade do Porto, Faculdade de Economia do Porto.
    7. Pedro Mazeda Gil & Oscar Afonso & Paulo Brito, 2012. "Skill Structure and Technology Structure: Innovation and Growth Implications," FEP Working Papers 470, Universidade do Porto, Faculdade de Economia do Porto.
    8. Gangopadhyay, Kausik & Nishimura, Atsushi & Pal, Rupayan, 2016. "Can the information technology revolution explain the incidence of co-movement of skill premium and stock prices?," Economic Modelling, Elsevier, vol. 53(C), pages 107-120.
    9. Pedro Mazeda Gil & Oscar Afonso & Paulo B. Vasconcelos, 2013. "Industry Dynamics and Aggregate Stability over Transition," FEP Working Papers 484, Universidade do Porto, Faculdade de Economia do Porto.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Afonso, Oscar & Leite, Rui, 2010. "Learning-by-doing, technology-adoption costs and wage inequality," Economic Modelling, Elsevier, vol. 27(5), pages 1069-1078, September.
    2. Afonso, Oscar, 2008. "The impact of government intervention on wage inequality without scale effects," Economic Modelling, Elsevier, vol. 25(2), pages 351-362, March.
    3. Afonso, Oscar & Gil, Pedro Mazeda, 2013. "Effects of North–South trade on wage inequality and on human-capital accumulation," Economic Modelling, Elsevier, vol. 35(C), pages 481-492.
    4. Nuno Torres & Óscar Afonso & Isabel Soares, 2017. "Manufacturing Skill-biased Wage Inequality, Natural Resources and Institutions," Review of Development Economics, Wiley Blackwell, vol. 21(4), pages 1-29, November.
    5. Afonso, Oscar & Neves, Pedro Cunha & Thompson, Maria, 2016. "The skill premium and economic growth with costly investment, complementarities and international trade of intermediate goods," Japan and the World Economy, Elsevier, vol. 37, pages 73-86.
    6. Afonso, Oscar, 2013. "Diffusion and directed technological knowledge, human capital and wages," Economic Modelling, Elsevier, vol. 31(C), pages 370-382.
    7. Neves, Pedro Cunha & Afonso, Óscar & Sequeira, Tiago Neves, 2018. "Population growth and the wage skill premium," Economic Modelling, Elsevier, vol. 68(C), pages 435-449.
    8. Oscar Afonso, 2010. "Growth And Wage Inequality In A Scale‐Independent Model With R&D And Human‐Capital Accumulation," Manchester School, University of Manchester, vol. 78(2), pages 149-182, March.
    9. Oscar Afonso & Pedro Neves & Maria Thompson, 2014. "The skill premium and economic growth with costly investment, complementarities and international technological-knowledge diffusion," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(6), pages 878-905, September.
    10. Tiago Neves Sequeira & Óscar Afonso, 2020. "Wage Inequality and Lobbying: a directed technical change approach," CeBER Working Papers 2020-05, Centre for Business and Economics Research (CeBER), University of Coimbra.
    11. Gancia, Gino & Zilibotti, Fabrizio, 2005. "Horizontal Innovation in the Theory of Growth and Development," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 3, pages 111-170, Elsevier.
    12. Sochirca, Elena & Gil, Pedro Mazeda & Afonso, Oscar, 2014. "Technology structure and skill structure: Costly investment and complementarity effects quantification," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 172-189.
    13. Hollanders, Hugo & Weel, Bas ter, 1999. "Skill-Biased Technical Change: On Endogenous Growth, Wage Inequality and Government Intervention," Research Memorandum 013, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
    14. Gries, T. & Grundmann, R. & Palnau, I. & Redlin, M., 2015. "Does technological change drive inclusive industrialization? : A review of major concepts and findings," MERIT Working Papers 2015-044, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    15. T. Gries & R. Grundmann & I. Palnau & M. Redlin, 2017. "Innovations, growth and participation in advanced economies - a review of major concepts and findings," International Economics and Economic Policy, Springer, vol. 14(2), pages 293-351, April.
    16. Sochirca, Elena & Afonso, Óscar & Gil, Pedro Mazeda, 2013. "Technological-knowledge bias and the industrial structure under costly investment and complementarities," Economic Modelling, Elsevier, vol. 32(C), pages 440-451.
    17. Afonso, Oscar, 2023. "Inflation, technological-knowledge bias, and wages," Research in Economics, Elsevier, vol. 77(1), pages 91-103.
    18. Bucci, Alberto, 2008. "Population growth in a model of economic growth with human capital accumulation and horizontal R&D," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1124-1147, September.
    19. Oscar Afonso, 2012. "Scale-independent North-South trade effects on the technological-knowledge bias and on wage inequality," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(1), pages 181-207, April.
    20. Li, Tailong & Pan, Shiyuan & Zou, Heng-fu, 2015. "Directed Technological Change: A Knowledge-Based Model," Macroeconomic Dynamics, Cambridge University Press, vol. 19(1), pages 116-143, January.

    More about this item

    Keywords

    R&D; Technological-Knowledge Bias; Wage Inequality; Complementarities; Costly Investment;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:por:fepwps:323. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/fepuppt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.