Capital-skill complementarity: does it still hold?

Capital-skill complementarity: does it still hold?

In this paper Castex et al. examine whether and under what conditions the capital-skill complementarity mechanism can be used to explain the rising wage inequality and declining labor share in recent years. In particular, they use a similar model as in Krusell, P., L. E. Ohanian, J.-V. Ríos-Rull, and G. L. Violante (2000) “Capital Skill Complementarity and Inequality: A Macroeconomic Analysis” but extend the sample from 1963–1992 to 1963-2016. The Castex et al. model allows for a more flexible structure of technology by introducing a flexible time variation in all parameters of the Krusell et al. model. They find:

• The elasticity of substitution between unskilled labor and capital equipment remains relatively stable across the rolling windows; whereas the elasticity of substitution between capital equipment and skilled labor exhibits an increasing trend when more recent years are included in
  the sample;
• Their model’s predictions confirm the skill premium and income inequality but also provide a good match for the declining labor share;
• The decline in capital-skill complementarity implies that a decrease in the price of capital equipment will lead to a smaller increase in the demand for skilled labor in the more recent years.

The Decline in Capital-Skill Complementarity
Authors: Gonzalo Castex, Sang-Wook (Stanley) Cho, Evgenia Dechter
From: University of New South Wales

Automation and redistribution

In this paper Acemoglu et al. counter a common belief that even if automation is contributing to the decline in the labor share and the stagnation of wages, the adoption of these technologies is beneficial, and any adverse consequences should be dealt with redistributive policies and investments in education and training. Instead, the authors argue that the US tax system is biased against labor and as a result generates excessive automation and sub-optimally low levels of employment and labor share. Their findings include:

• When the tax system is biased against labor, the gain from reducing automation and preventing the displacement of labor is first-order because it increases employment;
• In the absence of optimal taxes, efficiency can be increased by an automation tax which will reduce the equilibrium level of automation. This is because marginal automated tasks do not bring much productivity gains but displace workers, reducing employment below its socially optimal level.

Does the US Tax Code Favor Automation?
Authors: Daron Acemoglu, Andrea Manera, and Pascual Restrepo
From: MIT, Boston University

What a difference a pandemic makes!

Since the start of the pandemic in early 2020, wage growth in the United States for those in the lowest income quartile has tended to be higher than for those in the top quartile. Sectors seeing strong gains in hourly earnings include leisure and hospitality, retail trade, transportation and warehousing, and financial activities.

Reduced Wage Inequality Since the Pandemic
By: Timothy Taylor – Journal of Economic Perspectives