Skilled and Unskilled Labor Are Less Substitutable than Commonly Thought

Tomas Havranek, Zuzana Irsova, Lubica Laslopova and Olesia Zeynalova
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Lubica Laslopova: Charles University, Prague, Czech Republic

No 2020/29, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: A key parameter in the analysis of wage inequality is the elasticity of substitution between skilled and unskilled labor. We question the common view that the elasticity exceeds 1. Two biases, publication and attenuation, conspire to pull the mean elasticity reported in the lit- erature to 1.9. After correcting for the biases, the literature is consistent with the elasticity in the US of 0.6-0.9. Our analysis relies on 729 estimates of the elasticity collected from 76 studies as well as 37 controls that reflect the context in which the estimates were obtained. We use recently developed nonlinear techniques to correct for publication bias and employ Bayesian and frequentist model averaging to address model uncertainty. Our results sug- gest that, first, insignificant estimates of the elasticity are underreported. Second, because researchers typically estimate the elasticity´s inverse, measurement error exaggerates the elasticity, and we show the exaggeration is substantial. Third, elasticities are systematically larger for developed countries, translog estimation, and methods that ignore endogeneity.

Keywords: elasticity of substitution; skill premium; meta-analysis; model uncertainty; publication bias (search for similar items in EconPapers)
JEL-codes: J23 J24 J31 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2020-09, Revised 2020-09
New Economics Papers: this item is included in nep-lma and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Skilled and Unskilled Labor Are Less Substitutable than Commonly Thought (2021)
Working Paper: Skilled and Unskilled Labor Are Less Substitutable than Commonly Thought (2020)
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