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Revisiting Capital-Skill Complementarity, Inequality, and Labor Share

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Abstract

This paper revisits capital-skill complementarity and inequality, as in Krusell, Ohanian, Rios-Rull and Violante (KORV, 2000). Using their methodology, we study how well the KORV model accounts for more recent data, including the large changes in the labor's share of income that were not present in KORV. We study both labor share of gross income (as in KORV), and income net of depreciation. We also use nonfarm business sector output as an alternative measure of production to real GDP. We find strong evidence for continued capital-skill complementarity in the most recent data, and we also find that the model continues to closely account for the skill premium. The model captures the average level of labor share, though it overpredicts its level by 2-4 percentage points at the end of the period.

Suggested Citation

  • Lee E. Ohanian & Musa Orak & Shihan Shen, 2021. "Revisiting Capital-Skill Complementarity, Inequality, and Labor Share," International Finance Discussion Papers 1319, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1319
    DOI: 10.17016/IFDP.2021.1319
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    Cited by:

    1. Andrea L. Eisfeldt & Antonio Falato & Mindy Z. Xiaolan, 2023. "Human Capitalists," NBER Macroeconomics Annual, University of Chicago Press, vol. 37(1), pages 1-61.
    2. E. Mark Curtis & Daniel G. Garrett & Eric C. Ohrn & Kevin A. Roberts & Juan Carlos Suárez Serrato, 2021. "Capital Investment and Labor Demand," NBER Working Papers 29485, National Bureau of Economic Research, Inc.
    3. Castex, Gonzalo & (Stanley) Cho, Sang-Wook & Dechter, Evgenia, 2022. "The decline in capital-skill complementarity," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    4. Chu, Yihe & Li, Yujia & Che, Ming, 2024. "Population aging and the dynamics of the skill income gap: An analysis of a multiple mediation effect," Finance Research Letters, Elsevier, vol. 62(PB).
    5. Stephen J. Turnovsky & Zinan Wang, 2022. "The Effects of Globalization on Skilled Labor, Unskilled Labor, and the Skill Premium," Open Economies Review, Springer, vol. 33(3), pages 407-452, July.
    6. Cauvel, Michael & Pacitti, Aaron, 2022. "Bargaining power, structural change, and the falling U.S. labor share," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 512-530.
    7. Giovanni L. Violante, 2022. "Comment on "Human Capitalists"," NBER Chapters, in: NBER Macroeconomics Annual 2022, volume 37, pages 62-73, National Bureau of Economic Research, Inc.
    8. M. Battisti & M. Del Gatto & A. F. Gravina & C. F. Parmeter, 2021. "Robots versus labor skills: a complementarity/substitutability analysis," Working Paper CRENoS 202104, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    9. Nida Çakır Melek & Musa Orak, 2021. "The Income Share of Energy and Substitution: A Macroeconomic Approach," Research Working Paper RWP 21-18, Federal Reserve Bank of Kansas City.

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    More about this item

    Keywords

    Capital-skill complementarity; Elasticity of substitution; Inequality; Labor share; Skill premium; Technological change;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • 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
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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