What Drives the Skill Premium: Technological Change or Demographic Variation?

Hui He ()

No 200911, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: This paper quantitatively examines the effects of two exogenous driving forces, investment-specific technological change (ISTC) and the demographic change known as “the baby boom and the baby bust,” on the evolution of the skill premium in the postwar U.S. economy. I develop an overlapping generations general equilibrium model with endogenous discrete schooling choice. The production technology features capital-skill complementarity as in Krusell et al. (2000). ISTC, through capital-skill complementarity, raises the relative demand for skilled labor, while demographic variation affects the skill premium through changing the age structure and hence relative supply of skilled labor. I find that demographic change is more important in shaping the skill premium before 1980. Since then, ISTC takes over to drive the dramatic increase in the skill premium.

Keywords: Skill Premium; Schooling Choice; Demographic and Technological Change; Capital-Skill Complementarity; Overlapping Generations (search for similar items in EconPapers)
JEL-codes: E25 I21 J11 J24 J31 O33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-hrm, nep-lab and nep-mac
Date: 2009-03-01
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