The effect of a skilled workforce on price levels

Roni Frish

Research in Economics, 2025, vol. 79, issue 1

Abstract: This paper builds on Clague's argument that countries with skilled workers have lower costs for producing nontradable services, leading to a lower price level. It formalizes this idea in a model and validates it empirically using data from 95 countries over five decades. The analysis shows a significant negative effect of workforce education on the price level, confirming the Clague effect. However, this effect has diminished in the last two decades, likely due to skill-intensive services becoming more tradable through international e-commerce. The study highlights omitted variable bias in Balassa-Samuelson hypothesis tests, as they often exclude workforce skill level, which affects price level and productivity.

Keywords: Price levels (PPP); Empirical analysis; Balassa-Samuelson hypothesis; Skilled workers (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:79:y:2025:i:1:s1090944325000122

DOI: 10.1016/j.rie.2025.101035

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