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Capital-Skill Complementarity in Manufacturing: Lessons from the US Shale Boom

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  • Victor Hernandez Martinez

Abstract

This paper tests the existence of capital-skill complementarity in the manufacturing sector using quasi-experimental increases in the relative price of low-skill labor induced by the US shale boom. I find that in response to the shale boom, local manufacturing firms decreased their relative usage of low-skill labor while increasing their capital expenditures. These endogenous changes in the input mix allowed manufacturers to maintain the value added despite the increase in the price of low-skill labor, avoiding the potential short-term crowding-out effects of the natural resource boom. Combined with the findings of previous work, my results indicate that the degree of skill substitutable with capital in manufacturing has increased over the last several decades.

Suggested Citation

  • Victor Hernandez Martinez, 2024. "Capital-Skill Complementarity in Manufacturing: Lessons from the US Shale Boom," Working Papers 24-12, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:98308
    DOI: 10.26509/frbc-wp-202412
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    References listed on IDEAS

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    1. David Card & Thomas Lemieux, 2001. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 705-746.
    2. Katie Jo Black & Andrew J. Boslett & Elaine L. Hill & Lala Ma & Shawn J. McCoy, 2021. "Economic, Environmental, and Health Impacts of the Fracking Boom," Annual Review of Resource Economics, Annual Reviews, vol. 13(1), pages 311-334, October.
    3. Jason Brown, 2014. "Production of natural gas from shale in local economies: a resource blessing or curse?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 1-29.
    4. James, Alexander & Smith, Brock, 2017. "There will be blood: Crime rates in shale-rich U.S. counties," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 125-152.
    5. Branstetter, Lee G. & Laverde-Cubillos, N. Ricardo, 2024. "The dark side of the boom: Dutch disease, competition with China, and technological upgrading in Colombian manufacturing," Journal of International Economics, Elsevier, vol. 148(C).
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    More about this item

    Keywords

    capital-skill complementarity; manufacturing; fracking; natural resources; labor markets;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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