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Capital-Skill Complementarity and Inequality Over the Business Cycle

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Author Info
Matthew J. Lindquist (Stockholm University)

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Abstract

When capital-skill complementarity is present in the production process, changes in the skill premium are driven not only by changes in the ratio of unskilled- to skilled labor inputs (as they are in the case with Cobb-Douglas production), but also by changes in the capital-skill ratio. A simple regression analysis demonstrates that the capital-skill ratio has a positive and significant relation to the skill premium at business cycle frequencies as predicted by the capital-skill complementarity hypothesis. This finding motivates the construction of a stochastic dynamic general equilibrium model which allows for capital-skill complementarity in production. The model with capital-skill complementarity can account for the cyclical behavior of the skill premium and much of its volatility. The model without capital-skill complementarity cannot. These results, together with the available empirical evidence, suggest that capital-skill complementarity is an important determinant of wage inequality over the business cycle. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2003.11.001
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 7 (2004)
Issue (Month): 3 (July)
Pages: 519-540
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Handle: RePEc:red:issued:v:7:y:2004:i:3:p:519-540

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Related research
Keywords: capital-skills complementarity; inequality; relative wages; skill premium;

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Lindquist, Matthew, 2001. "Capital-Skill Complementarity and Inequality in Swedish Industry," Research Papers in Economics 2001:2, Stockholm University, Department of Economics, revised 05 Mar 2003. [Downloadable!]
  2. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  3. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September. [Downloadable!] (restricted)
  4. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November. [Downloadable!] (restricted)
  5. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers 449, University of Rochester - Center for Economic Research (RCER).
    Other versions:
  6. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January. [Downloadable!] (restricted)
  7. Francesco Caselli, 1999. "Technological Revolutions," American Economic Review, American Economic Association, vol. 89(1), pages 78-102, March. [Downloadable!] (restricted)
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  9. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9. [Downloadable!] (restricted)
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  11. Lindquist, Matthew J., 2005. "Capital-Skill Complementarity and Inequality in Sweden," Working Paper Series 2/2005, Swedish Institute for Social Research. [Downloadable!]
    Other versions:
  12. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December. [Downloadable!] (restricted)
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  14. Robert J. Gordon, 1989. "The Postwar Evolution of Computer Prices," NBER Working Papers 2227, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Dougherty, C R S, 1972. "Estimates of Labor Aggregation Functions," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1101-19, Nov.-Dec.. [Downloadable!] (restricted)
  17. Azariadis, Costas, 1976. "On the Incidence of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 43(1), pages 115-25, February. [Downloadable!] (restricted)
  18. Danthine, J.P. & Donaldson, J.B., 1993. "Non-Walrassian Economies," Papers 93-02, Columbia - Graduate School of Business.
  19. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, Summer.
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    Other versions:
  21. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Oxford University Press, vol. 12(4), pages 431-59, December.
  22. Castaneda, Ana & Diaz-Gimenez, Javier & Rios-Rull, Jose-Victor, 1998. "Exploring the income distribution business cycle dynamics," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 93-130, June. [Downloadable!] (restricted)
  23. Gomme, P. & Greenwood, J., 1993. "On the Cyclical Allocation of Risk," RCER Working Papers 355, University of Rochester - Center for Economic Research (RCER).
    Other versions:
  24. David N. DeJong & Beth F. Ingram & Charles H. Whiteman, 2000. "Keynesian impulses versus Solow residuals: identifying sources of business cycle fluctuations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(3), pages 311-329. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Linnea Polgreen & Pedro Silos, 2005. "Capital-skill complementarity and inequality: a sensitivity analysis," Working Paper 2005-20, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  2. Toshihiko Mukoyama & Aysegul Sahin, 2005. "The cost of business cycles for unskilled workers," Staff Reports 214, Federal Reserve Bank of New York. [Downloadable!]
  3. Lilia Maliar & Serguei Maliar, 2006. "Capital-Skill Complementarity And Steady-State Growth," Working Papers. Serie AD 2006-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  4. Linnea Polgreen & Pedro Silos, 2006. "Crude substitution: the cyclical dynamics of oil prices and the college premium," Working Paper 2006-14, Federal Reserve Bank of Atlanta. [Downloadable!]
  5. Jens Rubart, 2006. "Heterogeneous Labor, Labor Market Frictions and Employment Effects of Technological Change. Theory and Empirical Evidence for the U.S. and Europe," Darmstadt Discussion Papers in Economics 158, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
  6. Stuart J. Fowler & Eric R. Young, 2004. "The Acquisition of Skills over the Life-Cycle," Working Papers 200402, Middle Tennessee State University, Department of Economics and Finance. [Downloadable!]
  7. Eva MORENO-GALBIS & Henri SNEESSENS, 2007. "Low-skilled unemployment, capital-skill complementarity and embodied technical progress," Discussion Papers (REL - Recherches Economiques de Louvain) 2007031, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
    Other versions:
  8. Manuel A. Hidalgo, 2008. "Wage Inequality in Spain, 1980-2000," Working Papers 08.08, Universidad Pablo de Olavide, Department of Economics. [Downloadable!]
  9. Pourpourides, Panayiotis M., 2007. "Implicit Contracts and the Cyclicality of the Skill-Premium," Cardiff Economics Working Papers E2007/19, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2009. [Downloadable!]
  10. Toshihiko Mukoyama & Aysegul Sahin, 2005. "Costs of Business Cycles for Unskilled Workers," Working Papers 05002, Concordia University, Department of Economics. [Downloadable!]
    Other versions:
  11. Federico S. Mandelman & Andrei Zlate, 2008. "Immigration and the macroeconomy," Working Paper 2008-25, Federal Reserve Bank of Atlanta. [Downloadable!]
  12. Carlo Devillanova & Michele Di Maio & Pietro Vertova, 2006. "Labour Mobility, Capital-Skill Complementarity and the Redistributive Effects of Trade Integration," CESPRI Working Papers 188, CESPRI, Centre for Research on Innovation and Internationalisation, Universita' Bocconi, Milano, Italy, revised Nov 2006. [Downloadable!]
  13. Lindquist, Matthew J., 2005. "Capital-Skill Complementarity and Inequality in Sweden," Working Paper Series 2/2005, Swedish Institute for Social Research. [Downloadable!]
    Other versions:
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