Extending Development Accounting

This paper extends development accounting to an environment that features imperfectly substitutable skills and cross-country variation in the skill bias of technology. We find that human capital accounts for between 50% and 65% of cross-country income gaps. This finding remains robust when we consider alternative sources of skill-biased technology variation, alternative definitions of skilled and unskilled labor, and alternative values for the elasticity of substitution between skilled and unskilled labor. We derive closed form solutions for the contribution of human capital to output gaps in terms of observable data moments. These allow us to understand precisely which features of the data are responsible for our main results.