11 January 2023 - 11 January 2023
1:30PM - 3:00PM
Durham University Business School Mill Hill Lane Durham DH1 3LB UK
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Skill-Substitutability, Wage Inequality, and Productivity Growth
Zafer Kanik
University of Glasgow
We present a model of capital-labor substitution, where capital is produced by higher-skilled labor (i.e., engineers, scientists) and it substitutes for lower-skilled labor in final good production (e.g., assembly line workers, cashiers, clerks). We call this process “skill-substitutability.” An increase in the productivity of capital (e.g., more functional machinery, computer hardware) decreases its relative price; however, the rising share of higher-skilled labor in its production increases its relative price, which counteracts the productivity rise and slows down the capital-labor substitution. Furthermore, dropping wages of substitutable workers (i.e., lower-skilled labor) in the overall economy for other (i.e., non-substitution related) reasons contributes to the slow-down in capital-labor substitution. We calibrate our model by using the US data for 1987-2017 and show that these counteracting forces provide a novel explanation for the relatively stable share of equipment capital in value added.