Intermediate Goods–Skill Complementarity

Kozo Kiyota and Yoshinori Kurokawa

The B.E. Journal of Macroeconomics, 2024, vol. 24, issue 1, 149-186

Abstract: Recent research has begun to imply intermediate goods–skill complementarity; however, this possible complementarity has been hypothesized but not statistically tested, despite the increasing importance of intermediate goods in production. This study provides statistical evidence regarding whether intermediate goods are more complementary with skilled labor than with unskilled labor. Using panel data from 40 countries over the period 1995–2009, we estimate a two-level constant elasticity of substitution (CES) production function. Our major findings are fivefold. First, at the aggregated one-sector level, the elasticity of substitution between intermediate goods and unskilled labor is 1.22, which is significantly greater than that between intermediate goods and skilled labor of 1.05, indicating intermediate goods–skill complementarity. Second, at the disaggregated level, such complementarity is primarily observed in heavy manufacturing industries and the service sector, whereas complementarity is observed between intermediate goods and unskilled labor in the primary sector and light manufacturing industries. Third, the normalization of the data and the cumulant estimators exhibit stronger results. Fourth, our baseline results are confirmed applying several robustness checks, such as switching skilled and unskilled labor or considering capital–skill complementarity. Finally, intermediate goods–skill complementarity tends to be higher for industries that use more imported intermediate goods.

Keywords: intermediate goods–skill complementarity; elasticity of substitution; CES; skill-biased technological change; imported intermediate goods (search for similar items in EconPapers)
JEL-codes: E23 F10 J31 O47 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Intermediate Goods-Skill Complementarity (2019)
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DOI: 10.1515/bejm-2023-0008

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