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The Decline in Capital-Skill Complementarity

Author

Listed:
  • Gonzalo Castex

    (UNSW School of Economics)

  • Stanley Cho

    (UNSW School of Economics)

  • Evgenia Dechter

    (UNSW School of Economics)

Abstract

We revisit the capital-skill complementarity hypothesis and examine whether and under what conditions this mechanism can explain the developments in wage inequality and labor share in the 1963–2016 period. Krusell, Ohanian, Rios-Rull, and Violante (2000) show that a model with capital-skill complementarity mechanism matches the data well and can account for the changes in wage inequality in the 1963–1992 period. We show that applying the model to the 1963–2016 period delivers a good ï¬ t for the skill premium; however, it does not predict the declining pattern in labor share in the last two decades. We modify the model to allow for a flexible technology structure and show that the degree of capital-skill complementarity is declining over time. The model with time-varying capital-skill complementarity can match the changes in skill premium and labor share in the 1963–2016 period.

Suggested Citation

  • Gonzalo Castex & Stanley Cho & Evgenia Dechter, 2021. "The Decline in Capital-Skill Complementarity," Discussion Papers 2021-06, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2021-06
    as

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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2021-06.pdf
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    References listed on IDEAS

    as
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    1. The Decline in Capital-Skill Complementarity
      by Christian Zimmermann in NEP-DGE blog on 2021-10-14 04:34:05

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    More about this item

    Keywords

    capital-skill complementarity; technological change; skill-premium; labor share;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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