Structural change and the skill premium

Kaiming Guo, Jing Hang and Se Yan

Structural Change and Economic Dynamics, 2022, vol. 62, issue C, 247-261

Abstract: Unlike existing studies that highlight the role of directed technological change in causing variations in the skill premium, we argue that capital deepening and sectoral productivity growth—even when neither skill-biased nor unskilled-biased—may change the skill premium by driving structural change. Using a standard model of structural change with sectoral differences in factor-augmenting technologies, capital-labor substitutability and factor intensity, we show that a larger fraction of skilled labor may be reallocated to the less capital-intensive sector or the less flexible sector as the capital-labor ratio increases. The process may increase the skill premium if the sector absorbing more labor is skill-intensive and deceases the skill premium otherwise. Capital-augmenting or labor-augmenting technological change within a sector may also cause such changes, even when it is not skill-biased or unskilled-biased. We apply the model to the U.S. economy over the period 1977-2005. While the effects of capital deepening and within-sector capital-augmenting technological change are limited, within-sector labor-augmenting technological change significantly influences the skill premium through the mechanism of structural change. We find that without labor-augmenting technological change in the goods-producing sector, the skill premium decreases by about one quarter because the share of the services sector that is more skill-intensive than the goods-producing sector falls by more than half.

Keywords: Structural change; Skill premium (search for similar items in EconPapers)
JEL-codes: O14 O41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:62:y:2022:i:c:p:247-261

DOI: 10.1016/j.strueco.2022.05.011

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