DP15228 Capital-Skill Complementarity and Inequality: Twenty Years After

Author(s): Lilia Maliar, Serguei Maliar, Inna Tsener
Publication Date: August 2020
Keyword(s): capital-skill complementarity, CES production function, skill premium, skilled and unskilled labor
JEL(s): C73, D90, E21
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15228

A seminal work of Krusell, Ohanian, Ríos-Rull and Violante (2000) demonstrated that the capital-skill-complementarity mechanism is capable of explaining a U-shaped skill premium pattern over the 1963-1992 period in the US economy. However, the world experienced an unprecedented technological change since then. In this paper, we ask how the finding of their article change if we consider more recent data. First, we find that over the 1992-2017 period, the skill premium pattern changed dramatically, from a U-shaped to monotonically increasing, however, the capital-skill complementarity framework remains remarkably successful in explaining the data. Second, we use this framework to construct a projection, and we conclude that the skill premium will continue to grow in the US economy.