IMF Working Papers

The Elasticity of Substitution Between Skilled and Unskilled Labor in Developing Countries: A Directed Technical Change Perspective

By Alberto Behar

August 11, 2023

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Alberto Behar. The Elasticity of Substitution Between Skilled and Unskilled Labor in Developing Countries: A Directed Technical Change Perspective, (USA: International Monetary Fund, 2023) accessed November 21, 2024

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.

Subject: Education, Labor, Skilled labor, Technology, Unskilled labor, Wages

Keywords: Caribbean, Central America, Coefficient estimate, Consensus estimates of the elasticity, Elasticity of substitution, Global, Growth accounting, Inequality, Skill premium, Skill-biased technical change, Skilled labor, South America, Unskilled labor, Wage inequality, Wage premium, Wages

Publication Details

  • Pages:

    40

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/165

  • Stock No:

    WPIEA2023165

  • ISBN:

    9798400250514

  • ISSN:

    1018-5941

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