Calibrating relative wages induced by changed skill rates in long run projections

Marijke Kuiper, Caitlyn Carrico and Andrzej Tabeau

No 333188, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: Wages are a critical signal in CGE models, determining employment by sector and providing a main source of income for private households. Wage and changes in sectoral employment are also critical for policy decisions and evaluations, thus warranting close attention. CGE wages result from an interplay of model assumptions on (1) labour supply (labour endowments by type, supply by market segments); (2) labour demand (substitutability by sector, structural change); and (3) labour market functioning (assumptions on employment and wage adjustment possibilities). As better capturing long run changes in skilled and unskilled labour ratios is critical for food security and distributional consequences of policies, we focus on developing an empirical approach to judge (and calibrate) skilled to unskilled wage developments in CGE projections. Building Jones’ human capital accounting framework we derive a wage equation linking skilled to unskilled wage ratios to real output per worker (a proxy of human capital) and shares of unskilled to skilled labour. We add the parametrized Jones wage equation to the MAGNET global CGE model providing us a measure to judge endogenous MAGNET wage developments, and different means to adjust MAGNET projections. To link with literature we add a decomposition of the average wage change by skill into sectoral productivity increase and structural change driven by employment changes by sector. Using 6 scenarios varying in labour endowment projections (3 variants), labour supply substitution elasticity (2 variants) and targeting of the projected Jones wage ratios (1 variant) we explore the impact of different model assumptions on wage developments. Specifically we compare TFP, employment weighed labour substitution elasticities, wages by skill, skilled to unskilled wage ratio, and the relative contributions of sectoral productivity versus structural change to average wage developments.

Keywords: Labor; and; Human; Capital (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:333188

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