Capital-skill complementarity and inequality: A sensitivity analysis

Krusell et al. in [Krusell, P., Ohanian, L., Rios-Rull, J.V., Violante, G.L., 2000. Capital-skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029-1053] analyzed the capital-skill complementarity hypothesis as an explanation for the behavior of the US skill premium. We refit Krusell et al.'s [Krusell, P., Ohanian, L., Rios-Rull, J.V., Violante, G.L., 2000. Capital-skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029-1053] model with two alternative capital equipment price series: One proposed by Greenwood et al. [Greenwood, J., Hercowitz, Z., Krusell, P., 1997. Long-run implications of investment-specific technological change. Amer. Econ. Rev. 87 (3), 342-362] and the official, revised National Income and Product Accounts (NIPA) data. We find that capital-skill complementarity is preserved, but other results were sensitive to the data used. Specifically, the fit of the model was similar to Krusell et al.'s [Krusell, P., Ohanian, L., Rios-Rull, J.V., Violante, G.L., 2000. Capital-skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029-1053] using the NIPA data, but not the Greenwood et al. [Greenwood, J., Hercowitz, Z., Krusell, P., 1997. Long-run implications of investment-specific technological change. Amer. Econ. Rev. 87 (3), 342-362] data. Also, both series produce estimates of the elasticity of substitution between unskilled labor and equipment that are substantially larger than Krusell et al.'s [Krusell, P., Ohanian, L., Rios-Rull, J.V., Violante, G.L., 2000. Capital-skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029-1053] estimates. (c) 2007 Elsevier Inc. All rights reserved.