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The Decline in Capital-Skill Complementarity

50 Pages Posted: 29 Nov 2021 Publication Status: Under Review

See all articles by Gonzalo Castex

Gonzalo Castex

UNSW Business School

Sang-Wook (Stanley) Cho

UNSW Australia Business School, School of Economics

Evgenia Dechter

UNSW Australia Business School, School of Economics

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Abstract

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, Ríos-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

Suggested Citation

Castex, Gonzalo and Cho, Sang-Wook and Dechter, Evgenia, The Decline in Capital-Skill Complementarity. Available at SSRN: https://ssrn.com/abstract=3932847

Gonzalo Castex

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Sang-Wook Cho (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Evgenia Dechter

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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