The Elasticity of Substitution Between Skilled and Unskilled Labor in Developing Countries: A Directed Technical Change Perspective
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Summary:
We develop a model of endogenous skill-biased technical change in developing countries. The endogenous response to a rise in skill supply counters the traditional substitution effect and dampens its role in reducing wage inequality. The model re-enforces consensus estimates of the elasticity of substitution between more/less educated workers by reconciling dispersed existing estimates. It also rationalizes estimates that were hitherto deemed implausible or model-inconsistent. We produce new estimates for developing countries with a novel global panel (finding values at or just above 2) and with Latin American data that facilitates analysis of dynamics (which reduce estimates to 1.7-1.8). We therefore shed new light on a parameter that is crucial for inequality, growth, and other key macroeconomic questions.
Series:
Working Paper No. 2023/165
Subject:
Education Labor Skilled labor Technology Unskilled labor Wages
Frequency:
regular
English
Publication Date:
August 11, 2023
ISBN/ISSN:
9798400250514/1018-5941
Stock No:
WPIEA2023165
Format:
Paper
Pages:
40
Please address any questions about this title to publications@imf.org