Accounting for Skill Premium Patterns: Evidence from the EU Accession

In this article, we decompose the joint and individual contributions of tariff reductions, productivity changes and capital deepening to account for the skill premium patterns of the transition economies that joined the European Union (EU) in 2004. To conduct our accounting analysis, we construct an applied general equilibrium model with skilled and unskilled labor, and combining Social Accounting Matrices, Household Budget Surveys and the EU KLEMS Growth and Productivity Accounts database, we calibrate it to match Hungarian data, a transition economy where the skill premium consistently increased between 1995 and 2005. We find that capital deepening coupled with capital-skill complementarity is the main force behind the rise in the skill premium.