1/2018 Sang-Wook (Stanley) Cho and Julian P. Diaz. Skill Premium Divergence: The Roles of Trade, Capital and Demographics


Working Papers of Eesti Pank 1/2018

We construct an applied general equilibrium model to account for diverging patterns of the skill premium. Our framework assesses the roles of various factors that a ect the demand and supply of skilled and unskilled labor|shifts in the skill composition of the labor supply, changes in the terms of trade and the complementarity between skilled labor and equipment capital in production. We nd that increases in the relative skilled labor supply due to demographic changes lead to a decline in the skill premium, while equipment capital deepening raises the relative demand for skilled labor which in turn increases the skill premium. In addition, terms of trade changes lead to the reallocation of resources towards sectors in which countries enjoy comparative advantages. Since our model incorporates multiple factors simultaneously, it can generate either rising or falling skill premium paths. When we parametrize the model to the Baltic states|countries that were similar along many dimensions at the onset of their transition from centrally-planned to market-oriented economies|our model can closely account for the diverging patterns of skill premia for the period between 1995 and 2008.

JEL Codes: E16, E25, J24, J31

Keywords: skill premium, international trade, capital-skill complementarity, demographic change, Baltic state

DOI: 10.23656/25045520/012018/0152

E-mail: s.cho [at] unsw.edu.aujdiaz17 [at] luc.edu

The views expressed are those of the authors and do not necessarily represent the official views of the Eesti Pank or the Eurosystem.