Rejecting Capital-Skill Complementarity at All Costs

31 Pages Posted: 23 Jun 2001

See all articles by Manuel Frondel

Manuel Frondel

RWI Leibniz Institute for Economic Research ; Ruhr University Bochum (RUB)

Christoph M. Schmidt

RWI - Leibniz-Insitut für Wirtschaftsforschung (RWI Essen); Ruhr-Universität Bochum (RUB); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)

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Date Written: June 2001

Abstract

Any serious empirical study of factor substitutability has to allow the data to display complementarity as well as substitutability. The standard approach reflecting this idea is a translog specification - this is also the approach used by numerous studies analyzing the relative capital-skill complementarity hypothesis formulated by GRILICHES (1969). According to this hypothesis, the degree of substitutability between skilled labor and capital is lower than that for unskilled labor and capital. Yet, the results of empirical studies investigating this hypothesis are controversial. This paper offers a straightforward explanation: Using a translog approach reduces the issue of factor substitutability or complementarity to a question of cost shares. Our review of translog studies mentioned in HAMERMESH's (1993) summary on the demand for heterogeneous labor demonstrates that this argument is empirically relevant - all these studies can be reconciled with each other on the basis of the cost-share argument.

JEL Classification: C3, D2

Suggested Citation

Frondel, Manuel and Schmidt, Christoph M., Rejecting Capital-Skill Complementarity at All Costs (June 2001). IZA Discussion Paper No. 316. Available at SSRN: https://ssrn.com/abstract=273341

Manuel Frondel

RWI Leibniz Institute for Economic Research ( email )

Hohenzollernstr. 1-3
45128 Essen
Germany

Ruhr University Bochum (RUB) ( email )

Universitätsstraße 150
Bochum, NRW 44780
Germany

Christoph M. Schmidt (Contact Author)

RWI - Leibniz-Insitut für Wirtschaftsforschung (RWI Essen) ( email )

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Essen, 45128
Germany
++49 201 8149-227 (Phone)
++49 201 8149-236 (Fax)

Ruhr-Universität Bochum (RUB)

GC 2/150
Universitätsstr. 150
D-44780 Bochum
Germany

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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