Capital Imports Composition, Complementarities, and the Skill Premium in Developing Countries

55 Pages Posted: 3 May 2013 Last revised: 6 Aug 2015

See all articles by Ohad Raveh

Ohad Raveh

Hebrew University of Jerusalem

Ariell Reshef

Paris School of Economics (PSE); CNRS; Université Paris I Panthéon-Sorbonne - CES/CNRS; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Date Written: July 25, 2015

Abstract

We study how the composition of capital imports affects relative demand for skill and the skill premium in a sample of developing economies. Capital imports per se do not affect the skill premium; in contrast, their composition does. While imports of R&D-intensive capital equipment raise the skill premium, imports of less innovative equipment lower it. We estimate that R&D-intensive capital is complementary to skilled workers, whereas less innovative capital equipment is complementary to unskilled labor. which explains the composition effect. This mechanism has substantial explanatory power. Variation in tariffs, freight costs and overall barriers to trade, over time and across types of capital, favors imports of skill-complementary capital over other types. We calculate that reductions in barriers to trade increase inequality substantially in developing countries through the composition channel.

Keywords: Capital imports, capital-skill complementarity, skill premium, trade liberalization

JEL Classification: F14, F16, J23, J24, J31

Suggested Citation

Raveh, Ohad and Reshef, Ariell, Capital Imports Composition, Complementarities, and the Skill Premium in Developing Countries (July 25, 2015). Journal of Development Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2258009 or http://dx.doi.org/10.2139/ssrn.2258009

Ohad Raveh (Contact Author)

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, 91905
Israel

Ariell Reshef

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

CNRS ( email )

France

Université Paris I Panthéon-Sorbonne - CES/CNRS ( email )

106 bv de l'Hôpital
Paris, 75013
France

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

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