IDEAS home Printed from https://ideas.repec.org/p/zbw/zewdip/5382.html
   My bibliography  Save this paper

Rejecting capital-skill complementarity at all costs

Author

Listed:
  • Frondel, Manuel
  • Schmidt, Christoph M.

Abstract

Any serious empirical study of factor substitutability has to allow the data to display complementarity as well as substitutability. The standard approach reflecting this idea is a translog specification – this is also the approach used by numerous studies analyzing the relative capital-skill complementarity hypothesis formulated by GRILICHES (1969). According to this hypothesis, the degree of substitutability between skilled labor and capital is lower than that for unskilled labor and capital. Yet, the results of empirical studies investigating this hypothesis are controversial. This paper offers a straightforward explanation: Using a translog approach reduces the issue of factor substitutability or complementarity to a question of cost shares. Our review of translog studies mentioned in HAMERMESH?s (1993) summary on the demand for heterogeneous labor demonstrates that this argument is empirically relevant – all these studies can be reconciled with each other on the basis of the cost-share argument.

Suggested Citation

  • Frondel, Manuel & Schmidt, Christoph M., 2001. "Rejecting capital-skill complementarity at all costs," ZEW Discussion Papers 01-27, ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:5382
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/24448/1/dp0127.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Felix Fitzroy & Michael Funke, 1998. "Skills, Wages and Employment in East and West Germany," Regional Studies, Taylor & Francis Journals, vol. 32(5), pages 459-467.
    2. Bellmann Lutz & Bender Stefan & Schänk Thorsten, 1999. "Flexibilität der Qualifikationsstruktur aus betrieblicher Sicht: Substitutionalität oder Komplementarität / Flexibility of Firms’ Labor Demand: Substitutability or Complementarity," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 219(1-2), pages 109-126, February.
    3. Freeman, Richard B & Medoff, James L, 1982. "Substitution between Production Labor and Other Inputs in Unionized and Nonunionized Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 220-233, May.
    4. Ryan, David L. & Wales, Terence J., 2000. "Imposing local concavity in the translog and generalized Leontief cost functions," Economics Letters, Elsevier, vol. 67(3), pages 253-260, June.
    5. Berndt, Ernst R. & Morrisson, Catherine J., 1979. "Income redistribution and employment effects of rising energy prices," Resources and Energy, Elsevier, vol. 2(2-3), pages 131-150.
    6. Berger, Mark C., 1984. "Increases in energy prices, costs of production, and plant size," Journal of Economics and Business, Elsevier, vol. 36(3), pages 345-357, August.
    7. Kumbhakar, Subal C., 1997. "Modeling allocative inefficiency in a translog cost function and cost share equations: An exact relationship," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 351-356.
    8. Berndt, Ernst R & Christensen, Laurits R, 1974. "Testing for the Existence of a Consistent Aggregate Index of Labor Inputs," American Economic Review, American Economic Association, vol. 64(3), pages 391-404, June.
    9. Bergstrom, Villy & Panas, Epaminondas E, 1992. "How Robust Is the Capital-Skill Complementarity Hypothesis?," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 540-546, August.
    10. Turnovsky, Michelle H L & Donnelly, William A, 1984. "Energy Substitution, Separability, and Technical Progress in the Australian Iron and Steel Industry," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(1), pages 54-63, January.
    11. Manuel Frondel & Christoph M. Schmidt, 2002. "The Capital-Energy Controversy: An Artifact of Cost Shares?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 53-79.
    12. Denny, Michael & Fuss, Melvyn A, 1977. "The Use of Approximation Analysis to Test for Separability and the Existence of Consistent Aggregates," American Economic Review, American Economic Association, vol. 67(3), pages 404-418, June.
    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. Michel Dumont, 2006. "Foreign outsourcing, labour demand and the choice of functional form," Journal of Applied Economics, Universidad del CEMA, vol. 9, pages 255-273, November.
    2. Behl, Peter & Dette, Holger & Frondel, Manuel & Tauchmann, Harald, 2012. "Choice is suffering: A Focused Information Criterion for model selection," Economic Modelling, Elsevier, vol. 29(3), pages 817-822.
    3. Peter Behl & Holger Dette & Manuel Frondel & Harald Tauchmann, 2011. "Being Focused: When the Purpose of Inference Matters for Model Selection," Ruhr Economic Papers 0264, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    4. Ljubica Nedelkoska & Simon Wiederhold, 2010. "Technology, outsourcing, and the demand for heterogeneous labor: Exploring the industry dimension," Jena Economic Research Papers 2010-052, Friedrich-Schiller-University Jena.
    5. Manuel Frondel & Christoph M. Schmidt, 2006. "On the Restrictiveness of Separability: The Significance of Energy in German Manufacturing," RWI Discussion Papers 0038, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
    6. Juan A. Correa & Miguel Lorca & Francisco Parro, 2019. "Capital–Skill Complementarity: Does Capital Composition Matter?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(1), pages 89-116, January.
    7. repec:zbw:rwirep:0256 is not listed on IDEAS
    8. Frondel, Manuel, 2011. "Modeling Energy and Non-energy Substitution – A Survey of Elasticities," Ruhr Economic Papers 256, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    9. Eva, MORENO GALBIS, 2002. "Changes in the skill structure of the labour force. An empirical application to the Spanish case," LIDAM Discussion Papers IRES 2002035, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    10. Frondel, Manuel, 2011. "Modelling energy and non-energy substitution: A brief survey of elasticities," Energy Policy, Elsevier, vol. 39(8), pages 4601-4604, August.
    11. Manuel Frondel & Peter Behl & Holger Dette & Harald Tauchmann, 2011. "Choice is Suffering: A Focused Information Criterion for Model Selection Activation Program for Disadvantaged Youths," Ruhr Economic Papers 0250, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    12. repec:zbw:rwidps:0038 is not listed on IDEAS
    13. repec:zbw:rwirep:0264 is not listed on IDEAS
    14. Frondel, Manuel & Schmidt, Christoph M., 2006. "On the Restrictiveness of Separability: The Significance of Energy in German Manufacturing," RWI Discussion Papers 38, RWI - Leibniz-Institut für Wirtschaftsforschung.
    15. Behl, Peter & Dette, Holger & Frondel, Manuel & Tauchmann, Harald, 2013. "Energy substitution: When model selection depends on the focus," Energy Economics, Elsevier, vol. 39(C), pages 233-238.
    16. Behl, Peter & Dette, Holger & Frondel, Manuel & Tauchmann, Harald, 2011. "Being Focused: When the Purpose of Inference Matters for Model Selection," Ruhr Economic Papers 264, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    17. Manuel Frondel, 2011. "Modeling Energy and Non-energy Substitution – A Survey of Elasticities," Ruhr Economic Papers 0256, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    18. repec:zbw:rwirep:0250 is not listed on IDEAS

    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. Havranek, Tomas & Irsova, Zuzana & Laslopova, Lubica & Zeynalova, Olesia, 2020. "The Elasticity of Substitution between Skilled and Unskilled Labor: A Meta-Analysis," MPRA Paper 102598, University Library of Munich, Germany.
    2. Frondel, Manuel & Schmidt, Christoph M., 2006. "On the Restrictiveness of Separability: The Significance of Energy in German Manufacturing," RWI Discussion Papers 38, RWI - Leibniz-Institut für Wirtschaftsforschung.
    3. repec:zbw:rwidps:0038 is not listed on IDEAS
    4. repec:eee:labchp:v:1:y:1986:i:c:p:429-471 is not listed on IDEAS
    5. Manuel Frondel & Christoph M. Schmidt, 2006. "On the Restrictiveness of Separability: The Significance of Energy in German Manufacturing," RWI Discussion Papers 0038, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
    6. Juan A. Correa & Miguel Lorca & Francisco Parro, 2019. "Capital–Skill Complementarity: Does Capital Composition Matter?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(1), pages 89-116, January.
    7. Rosario Crinò, 2010. "Service Offshoring and White-Collar Employment," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 595-632.
    8. Grant, James H & Hamermesh, Daniel S, 1981. "Labor Market Competition among Youths, White Women and Others," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 354-360, August.
    9. Koebel, Bertrand M. & Falk, Martin, 1999. "Curvature conditions and substitution pattern among capital, energy, materials and heterogeneous labour," ZEW Discussion Papers 99-06, ZEW - Leibniz Centre for European Economic Research.
    10. Martin Falk & Bertrand Koebel, 2001. "A dynamic heterogeneous labour demand model for German manufacturing," Applied Economics, Taylor & Francis Journals, vol. 33(3), pages 339-348.
    11. Hanan Nazier, 2019. "Estimating Labor Demand Elasticities and Elasticities of Substitution in Egyptian Manufacturing Sector: A Firm-Level Static Analysis," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 62(4), pages 549-575, December.
    12. John Addison & Lutz Bellmann & Thorsten Schank & Paulino Teixeira, 2008. "The Demand for Labor: An Analysis Using Matched Employer–Employee Data from the German LIAB. Will the High Unskilled Worker Own-Wage Elasticity Please Stand Up?," Journal of Labor Research, Springer, vol. 29(2), pages 114-137, June.
    13. repec:taf:applec:45:y:2013:i:18:p:2547-2562 is not listed on IDEAS
    14. Hamermesh, Daniel S., 1987. "The demand for labor in the long run," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 8, pages 429-471, Elsevier.
    15. Serletis, Apostolos & Timilsina, Govinda R. & Vasetsky, Olexandr, 2010. "Interfuel substitution in the United States," Energy Economics, Elsevier, vol. 32(3), pages 737-745, May.
    16. Correa, Juan & Lorca, Miguel & Parro, Francisco, 2014. "Capital-Skill Complementarity: Does capital disaggregation matter?," MPRA Paper 61285, University Library of Munich, Germany.
    17. H. Naci Mocan, 1995. "The Child Care Industry: Cost Functions, Efficiency, and Quality," NBER Working Papers 5293, National Bureau of Economic Research, Inc.
    18. Michael Ben-Gad, 2008. "Capital-Skill Complementarity and the Immigration Surplus," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 335-365, April.
    19. Akay, Gokhan H. & Yuksel, Mutlu, 2009. "Capital-Skill Complementarity: Evidence from Manufacturing Industries in Ghana," IZA Discussion Papers 4674, Institute of Labor Economics (IZA).
    20. Allen, Steven G, 1986. "Union Work Rules and Efficiency in the Building Trades," Journal of Labor Economics, University of Chicago Press, vol. 4(2), pages 212-242, April.
    21. Laura Padilla Angulo, 2013. "Labour inputs substitution during corporate restructuring: a translog model approach for US freight railroads," Applied Economics, Taylor & Francis Journals, vol. 45(18), pages 2547-2562, June.
    22. Koebel, Bertrand M. & Falk, Martin & Laisney, François, 2000. "Imposing and testing curvature conditions on a Box-Cox function," ZEW Discussion Papers 00-70, ZEW - Leibniz Centre for European Economic Research.
    23. Kyoji Fukao & Tsutomu Miyagawa & Hak Kil Pyo & Keun Hee Rhee, 2012. "Estimates of Total Factor Productivity, the Contribution of ICT, and Resource Reallocation Effects in Japan and Korea," Chapters, in: Matilde Mas & Robert Stehrer (ed.),Industrial Productivity in Europe, chapter 9, Edward Elgar Publishing.

    More about this item

    Keywords

    Substitutability; Translog Cost Function;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

    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:zbw:zewdip:5382. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - Leibniz Information Centre for Economics). General contact details of provider: http://edirc.repec.org/data/zemande.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.