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Unraveling the Skill Premium

Author

Listed:
  • Peter McAdam

    (University of Surrey and ECB)

  • Alpo Willman

    (University of Kent)

Abstract

For the US the supply and wages of skilled labor relative to those of unskilled labor have grown over the postwar period. The literature has tended to explain this through “skill-biased technical change”. Empirical work has concentrated around two variants: (1) Capital-skill complementarity, (2) Skill-augmenting technical change. Our purpose is to nest and discriminate between these two explanations. We do so in the framework of multi-level CES production function where factors are disaggregated into skilled and unskilled labor, and capital into structures and equipment capital. Using a 5-equation system approach and several nesting alternatives, we retrieve estimates of the substitution elasticities and technical changes. Our estimations can produce results in line with capital-skill-complementarity hypothesis. However, those results are outperformed where the only source of the widening skill-premium has been skill-augmenting technical change. We also show that the different explanations for SBTC have different implications for projected developments of the premium.

Suggested Citation

  • Peter McAdam & Alpo Willman, 2017. "Unraveling the Skill Premium," School of Economics Discussion Papers 0117, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0117
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    File URL: https://repec.som.surrey.ac.uk/2017/DP01-17.pdf
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    Cited by:

    1. Trenczek, Jan & Wacker, Konstantin M., 2023. "Human Capital Misallocation and Output per Worker Differences: Beyond Cobb-Douglas," GLO Discussion Paper Series 1331, Global Labor Organization (GLO).
    2. Vladimir Matveenko & Shamil Sharapudinov, 2016. "Factor-Biased Technological Change and the Skill Premium: A Cross-Country Evidence," EUSP Department of Economics Working Paper Series Ec-05/16, European University at St. Petersburg, Department of Economics.
    3. Lagomarsino, Elena, 2021. "Which nesting structure for the CES? A new selection approach based on input separability," Economic Modelling, Elsevier, vol. 102(C).
    4. Michael Knoblach & Fabian Stöckl, 2020. "What Determines The Elasticity Of Substitution Between Capital And Labor? A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 847-875, September.
    5. Jan Trenczek & Konstantin M. Wacker, 2023. "Accounting for cross-country output differences: A sectoral CES perspective," Working Papers 2023.09, International Network for Economic Research - INFER.
    6. Vladimir Matveenko & Shamil Sharapudinov, 2016. "Factor-Biased Technological Change and the Skill Premium: A Cross-Country Evidence," EUSP Department of Economics Working Paper Series 2016/05, European University at St. Petersburg, Department of Economics.
    7. Knoblach, Michael, 2019. "Skill-biased technological change, endogenous labor supply, and the skill premium," CEPIE Working Papers 03/19, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    8. Afonso, Oscar & Gil, Pedro Mazeda, 2024. "Territorial comparative advantage, wage inequality, and monetary policy in the global world," Journal of International Money and Finance, Elsevier, vol. 143(C).
    9. Óscar Afonso & Pedro G. Lima & Tiago Sequeira, 2022. "The effects of automation and lobbying in wage inequality: a directed technical change model with routine and non-routine tasks," Journal of Evolutionary Economics, Springer, vol. 32(5), pages 1467-1497, November.
    10. Garcia-Lazaro, Aida & Mendez-Astudillo, Jorge & Lattanzio, Susan & Larkin, Charles & Newnes, Linda, 2025. "The digital skill premium: Evidence from job vacancy data," Economics Letters, Elsevier, vol. 250(C).
    11. Afonso, Oscar, 2023. "Inflation, technological-knowledge bias, and wages," Research in Economics, Elsevier, vol. 77(1), pages 91-103.
    12. Zhang, Dongyang & Wang, Cao & Miao, Shan & Deng, Lei, 2024. "The impact of firm's ESG performance on the skill premium: Evidence from China's green finance reform pilot zone," International Review of Financial Analysis, Elsevier, vol. 93(C).
    13. Óscar Afonso & Ana Maria Bandeira & Manuela Magalhães, 2017. "Effect of the Tax System ON R&D Intensity, Growth, Wages and Consumption Share," Australian Economic Papers, Wiley Blackwell, vol. 56(4), pages 271-291, December.
    14. Jong‐Suk Han & Jong‐Wha Lee & Eunbi Song, 2024. "Skill substitutability, trade with China and college wage premium in Korea," The World Economy, Wiley Blackwell, vol. 47(2), pages 415-439, February.

    More about this item

    JEL classification:

    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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