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Rising Skill Premium?

: The Roles of Capital-Skill Complementarity and Sectoral Shifts in a Two-Sector Economy

October 28, 2014
Naoko Hara*
Munechika Katayama**
Ryo Kato***


Empirical studies report a marked dispersion in skill-premium changes across economies over the past few decades. Structural models in early studies successfully replicate the increases in skill premiums in many economies, while some other cases with a decline in the skill premium are yet to be explained. To this end, we develop a two-sector (i.e., manufacturing and non-manufacturing) general equilibrium model with skilled and unskilled labor, in which degrees of capital-skill complementarity differ across sectors. Based on the estimated structural parameters, we show that a decline in capital-skill complementarity in the non-manufacturing sector can provide a consistent explanation for the following aspects of the Japanese data at both the aggregate and industry levels: (i) a decline in the skill premium, (ii) widening of the sectoral wage gap due to a rise in manufacturing wages and decline in non-manufacturing wages, and (iii) an increase in the unskilled labor share in the non-manufacturing sector. We interpret that this change reflects compositional effects and uneven technology adoption of firms within non-manufacturing.

JEL Classifications
E22; E24; J31

Capital-skill Complementarity; Skill Premium; Two-sector DSGE Model; Bayesian Estimation.

We thank Kosuke Aoki, Seisaku Kameda, Michael Krause, Eiji Maeda, Shinichi Nishioka, staff of the Bank of Japan, and conference/seminar participants at the Common Challenges in Asian and Europe, Asian Meeting of Econometrics Society, Computing in Economics and Finance, Econometrics Society Australasian Meeting, and Kyoto University for their helpful comments and suggestions. Views expressed here are those of the authors and do not necessarily reflect those of the Bank of Japan.

*Research and Statistics Department, Bank of Japan
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**Kyoto University
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***Research and Statistics Department (currently Monetary Affairs Department), Bank of Japan
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