Comparative Advantage, Relative Wages, and the Accumulation of Human Capital

Abstract

We apply Ricardo's principle of comparative advantage for a theory of factor substitutability. An assignment model with a continuum of worker and job types is applied. Highly skilled workers have a comparative advantage in complex jobs. The model satisfies the Distance Dependent Elasticity of Substitution characteristic: substitutability between types declines with their skill distance. The model is particularly useful for the analysis of the effects of human capital accumulation on relative wages. These effects can be decomposed in composition and extension effects. Composition effects compress the wage distribution. Then, an equiproportional increase in human capital of all skill types compresses the wage distribution, since extension effects cancel in that case. A workhorse model is provided capturing human capital accumulation and skill biased technological progress. Empirical studies suggest a one year rise in the average level of education to reduce the return to human capital by 20%.

Keywords: assignment, wage distribution, human capital

JEL Classification: D30, J24