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Aggregate elasticity of substitution between skills: estimates from a macroeconomic approach

Published online by Cambridge University Press:  28 July 2022

Michał Jerzmanowski  and
Robert Tamura
Michał Jerzmanowski
Affiliation:
John E. Walker Department of Economics, Clemson University, Clemson, SC, USA
Robert Tamura*
Affiliation:
John E. Walker Department of Economics, Clemson University, Clemson, SC, USA
*
*Corresponding author. Email: rtamura@clemson.edu
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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 US microdata, 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 1.7 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 possible.

Keywords

Elasticity of substitutionhigh-skill laborlow-skill laborskill premiumstrong skill-biasendogenous-directed technologyE24E25O11J31
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 6 , September 2023 , pp. 1597 - 1627
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

†

We would like to thank the participants of the Southern Economics Association’s Meetings in New Orleans, Simon Gilchrist, the editors, and two anonymous referees for helpful comments and suggestions.

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