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What drives the skill premium: Technological change or demographic variation?

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  • He, Hui

Abstract

This paper quantitatively examines the effects of two exogenous driving forces, investment-specific technological change (ISTC) and the demographic change known as “the baby boom and the baby bust,” on the evolution of the skill premium and the college enrollment rate in the postwar U.S. economy. We develop a general equilibrium overlapping generations model with endogenous discrete schooling choice. The production technology features capital–skill complementarity as in Krusell et al. (2000). ISTC, through capital–skill complementarity, raises the relative demand for skilled labor, while demographic variation affects the skill premium by changing the age structure and hence the relative supply of skilled labor. We find that ISTC is the key element driving the skill premium in the postwar U.S. economy. And it is quantitatively important for the dynamics of the college enrollment rate. The quantitative importance of the demographic change for the evolution of both the skill premium and the college enrollment rate however is limited.

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  • He, Hui, 2012. "What drives the skill premium: Technological change or demographic variation?," European Economic Review, Elsevier, vol. 56(8), pages 1546-1572.
    • Handle: RePEc:eee:eecrev:v:56:y:2012:i:8:p:1546-1572
    DOI: 10.1016/j.euroecorev.2012.09.005
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    More about this item

    Keywords

    Skill premium; Schooling choice; Capital–skill complementarity; Investment-specific technological change; Demographic change;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education

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