The Decline in Capital-Skill Complementarity

Gonzalo Castex (g.castexhernandez@unsw.edu.au), Sang-Wook Cho (s.cho@unsw.edu.au) and Evgenia Dechter
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Gonzalo Castex: UNSW School of Economics

No 2021-06, Discussion Papers from School of Economics, The University of New South Wales

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.

Keywords: capital-skill complementarity; technological change; skill-premium; labor share (search for similar items in EconPapers)
JEL-codes: E13 E25 J23 J31 O33 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2021-07
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: The decline in capital-skill complementarity (2022)
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