Capital-Skill Complementarity and Inequality: A Sensitivity Analysis

In "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis", Krusell, Ohanian, Rios-Rull, and Violante (2000) (KORV hereafter) analyzed the capital-skill complementarity hypothesis as an explanation for the behavior of the U.S. skill premium. We re-fit KORV's model with two alternative capital equipment price series: one proposed by Greenwood et al. (GHK, 1997) 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 KORV's using the NIPA data, but not the GHK data. Also, both series produce estimates of the elasticity of substitution between unskilled labor and equipment that are substantially larger than KORV's estimates. (Copyright: Elsevier)