Aggregate Elasticity of Substitution between Skills: Estimates from a Macroeconomic Approach

39 Pages Posted: 23 Jun 2020

See all articles by Michal Jerzmanowski

Michal Jerzmanowski

Clemson University - John E. Walker Department of Economics

Robert Tamura

Independent

Date Written: May 30, 2020

Abstract

We estimate the elasticity of substitution between high-skill and low-skill workers using panel data from 32 countries during 1970-2015. Most existing estimates, which are based only on U.S. micro data, find a value close to 1.6. We bring international data together with a theory-informed macro approach to provide new evidence on this important macroeconomic parameter. Using the macro approach we find that the elasticity of substitution between tertiary-educated workers and those with lower education levels falls between 1.8 and 2.6, which is higher than previous estimates but within a plausible range. In some specifications, estimated elasticity is above the value required for strong skill-bias of technology, suggesting strong skill-bias is not implausible.

Keywords: elasticity of substitution, high-skill labor, low-skill labor, skill premium, strong skill-bias, endogenous directed technology

JEL Classification: E24, E25, O11, J31

Suggested Citation

Jerzmanowski, Michal and Tamura, Robert, Aggregate Elasticity of Substitution between Skills: Estimates from a Macroeconomic Approach (May 30, 2020). Available at SSRN: https://ssrn.com/abstract=3614518 or http://dx.doi.org/10.2139/ssrn.3614518

Michal Jerzmanowski (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

Robert Tamura

Independent

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