The elasticity of substitution between skilled and unskilled labor in developing countries: A directed technical change perspective

Alberto Behar

Journal of Development Economics, 2025, vol. 174, issue C

Abstract: I develop a model of endogenous skill-biased technical change in developing countries. The endogenous response to a rise in skill supply counters the traditional substitution effect and dampens supply’s role in reducing wage inequality. The model reinforces consensus estimates of the elasticity of substitution between more/less educated workers by reconciling dispersed existing estimates. It also rationalizes estimates that were hitherto deemed implausible or theory-inconsistent. I produce new estimates for developing countries with a new global panel and with Latin American data (that facilitates analysis of dynamics). Many estimated elasticity values are almost 2. This sheds new light on a parameter that is crucial for inequality, growth, and other key macroeconomic questions.

Keywords: Skill-biased technical change; Elasticity of substitution; Skill premium; Inequality; Growth accounting (search for similar items in EconPapers)
JEL-codes: I20 J23 J24 J31 O15 O33 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:174:y:2025:i:c:s0304387824001603

DOI: 10.1016/j.jdeveco.2024.103411

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