May 2021

Revisiting Capital-Skill Complementarity, Inequality, and Labor Share

Lee Ohanian, Musa Orak, Shihan Shen

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.

Keywords: Capital-skill complementarity, elasticity of substitution, inequality, labor share, skill premium, technological change.

DOI: https://doi.org/10.17016/IFDP.2021.1319

PDF: Full Paper

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Last Update: May 27, 2021