Aggregation, the skill premium, and the two-level production function

Peter McAdam (), Alpo Willman and Miguel Leon-Ledesma

No 1400, Working Paper Series from European Central Bank

Abstract: We examine the two-level nested Constant Elasticity of Substitution production function where both capital and labor are disaggregated in two classes. We propose a normalized system estimation method to retrieve estimates of the inter- and intra-class elasticities of substitution and factoraugmenting technical progress coefficients. The system is estimated for US data for the 1963-2006 period. Our findings reveal that skilled and unskilled labor classes are gross substitutes, capital structures and equipment are gross complements, and aggregate capital and aggregate labor are gross complements with an elasticity of substitution close to 0.5. We discuss the implications of our findings and methodology for the analysis of the causes of the increase in the skill premium and, by implication, inequality in a growing economy. JEL Classification: E25, J23, J24, O40

Keywords: aggregation; Factor-Augmenting Technical Progress; Factor Substitution; skill-premium; Two-level CES production function (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-eff and nep-lma
Note: 50336
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111400

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