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Aggregation, the skill premium, and the two-level production function

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  • McAdam, Peter
  • Willman, Alpo
  • León-Ledesma, Miguel A.

Abstract

We examine the two-level nested Constant Elasticity of Substitution production function where both capital and labor are disaggregated in two classes. We propose a normalized system estimation method to retrieve estimates of the inter- and intra-class elasticities of substitution and factoraugmenting technical progress coefficients. The system is estimated for US data for the 1963-2006 period. Our findings reveal that skilled and unskilled labor classes are gross substitutes, capital structures and equipment are gross complements, and aggregate capital and aggregate labor are gross complements with an elasticity of substitution close to 0.5. We discuss the implications of our findings and methodology for the analysis of the causes of the increase in the skill premium and, by implication, inequality in a growing economy. JEL Classification: E25, J23, J24, O40

Suggested Citation

  • McAdam, Peter & Willman, Alpo & León-Ledesma, Miguel A., 2011. "Aggregation, the skill premium, and the two-level production function," Working Paper Series 1400, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20111400
    Note: 50336
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    References listed on IDEAS

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    6. McAdam, Peter & Willman, Alpo & León-Ledesma, Miguel A., 2010. "In dubio pro CES - Supply estimation with mis-specified technical change," Working Paper Series 1175, European Central Bank.
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    Cited by:

    1. Matteo F. Ghilardi & Raffaele Rossi, 2014. "Aggregate Stability and Balanced‐Budget Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1787-1809, December.
    2. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
    3. Florio, Erminia & Kharazi, Aicha, 2022. "Curtailment of Economic Activity and Labor Inequalities," GLO Discussion Paper Series 1166, Global Labor Organization (GLO).

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    More about this item

    Keywords

    aggregation; Factor-Augmenting Technical Progress; Factor Substitution; skill-premium; Two-level CES production function;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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