The Decline in Capital-Skill Complementarity
50 Pages Posted: 11 Aug 2021
Date Written: July 26, 2021
We revisit the capital-skill complementarity hypothesis and examine whether and under what conditions this mechanism can explain the developments in wage inequality and labor share in the 1963–2016 period. Krusell, Ohanian, Rios-Rull, and Violante (2000) show that a model with capital-skill complementarity mechanism matches the data well and can account for the changes in wage inequality in the 1963–1992 period. We show that applying the model to the 1963–2016 period delivers a good ﬁt for the skill premium; however, it does not predict the declining pattern in labor share in the last two decades. We modify the model to allow for a ﬂexible technology structure and show that the degree of capital-skill complementarity is declining over time. The model with time-varying capital-skill complementarity can match the changes in skill premium and labor share in the 1963–2016 period.
Keywords: capital-skill complementarity, technological change, skill-premium, labor share
JEL Classification: E13, E25, J23, J31, O33
Suggested Citation: Suggested Citation