The Elasticity of Substitution Between Skilled and Unskilled Labor in Developing Countries: A Directed Technical Change Perspective

Alberto Behar

No 2023/165, IMF Working Papers from International Monetary Fund

Abstract: We 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 its role in reducing wage inequality. The model re-enforces 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 model-inconsistent. We produce new estimates for developing countries with a novel global panel (finding values at or just above 2) and with Latin American data that facilitates analysis of dynamics (which reduce estimates to 1.7-1.8). We therefore shed 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; consensus estimates of the elasticity; wage inequality; wage premium; coefficient estimate; Skilled labor; Wages; Unskilled labor; Central America; South America; Caribbean; Global (search for similar items in EconPapers)
Pages: 40
Date: 2023-08-11
New Economics Papers: this item is included in nep-gro and nep-lma
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