Accounting for Skill Premium Patterns During the EU Accession: Productivity or Trade?

32 Pages Posted: 31 Jan 2014

See all articles by Sang-Wook (Stanley) Cho

Sang-Wook (Stanley) Cho

UNSW Australia Business School, School of Economics

Julian P. Diaz

Loyola University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2014

Abstract

In this article, we disentangle the relationship between the skill premium, trade liberalization and productivity changes in accounting for the skill premium patterns of transition economies that joined the European Union (EU) in 2004. To conduct our analysis, we construct an applied general equilibrium model with skilled and unskilled labor, and combining Social Accounting Matrices, Household Budget Surveys and the EU KLEMS Growth and Productivity Accounts database, we calibrate it to match Hungarian data, a transition economy where the skill premium consistently increased between 1995 and 2005. We then assess the role of the multiple factors that affected the patterns of the skill premium: trade liberalization reforms, factor and sector bias of technical change and capital deepening, and find that all the factors can jointly account for approximately 87% of the actual change in skill premium between 1995 and 2005. Individually, capital deepening accounts for the largest share of the rise in the skill premium, whereas trade liberalization accounts for a small portion of that increase. While productivity changes account for only a small fraction of the skill premium increases during 1995 and 2000, they significantly offset the impact of the capital deepening on the skill premium in the period between 2000 and 2005.

Keywords: Transition Economies, Skill Premium, Trade Liberalization, Skill-biased Technical Change, Capital-skill complementarity

JEL Classification: D58, E16, F16, O33

Suggested Citation

Cho, Sang-Wook and Diaz, Julian P., Accounting for Skill Premium Patterns During the EU Accession: Productivity or Trade? (January 29, 2014). Available at SSRN: https://ssrn.com/abstract=2387988 or http://dx.doi.org/10.2139/ssrn.2387988

Sang-Wook Cho (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Julian P. Diaz

Loyola University of Chicago ( email )

25 East Pearson Street
Chicago, IL 60611
United States

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