Aggregate Elasticity of Substitution between Skills: Estimates from a Macroeconomic Approach
39 Pages Posted: 23 Jun 2020
Date Written: May 30, 2020
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: Suggested Citation