Explaining the Skill Premium: Technical Change or Capita-Skill Complements?

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

No 4356, EcoMod2012 from EcoMod

Abstract: We examine the two-level and the three-level nested four factor Constant Elasticity of Substitution production functions, where labor is disaggregated into skilled and unskilled labor and the capital stock into structures and equipment capital. We estimate inter-factor substitution elasticity and factor-augmenting technical progress parameters. Our special focus of interest is in the issue, whether the source of the observed skill-premium between the wage rates of skilled and unskilled labor is capital-skill complementarity or the skill biased technical change.With several alternative ways to nest the four factors of the production function we derive in the profit maximization framework four-equation systems containing several cross equation parameter constraints. We estimate these systems with the NLSUR estimation method.Our estimation results reject the capital skill-complementarity hypothesis. Instead, our results favour the production function specification, where skilled and unskilled labor are gross substitutes, whilst structures and equipment capital are cross substitutes both with each other and with skilled and unskilled labor. Technical progress is the most strongly biased towards skilled labor explaining the skill-premium between the wage rates of skilled and unskilled labor.

Keywords: US annual data for the 1963-2006 period.; Growth; Labor market issues (search for similar items in EconPapers)
Date: 2012-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://ecomod.net/system/files/CES-4-factor_EcoMod_2.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ekd:002672:4356

Access Statistics for this paper

More papers in EcoMod2012 from EcoMod Contact information at EDIRC.
Bibliographic data for series maintained by Theresa Leary ().