Estimating the Impact of SBTC on Input Demand Elasticities in Hungary

Recent changes in the distribution of income have drawn significant attention to the changing relationship between factors of production in the aggregate production function. These changes entail corresponding changes in factor rewards and relative income levels. This paper examines how the position and income of skilled labour relative to unskilled labour have changed during the recent years in Hungary. A popular explanation to their changing position is offered by the concept of skill biased technological change (SBTC) that increases relative demand for skilled labour and can be captured through capital-skill complementarity. In this paper, own- and cross-price elasticities of factor demand are derived from a flexible functional form: a translog cost function. The estimation is based on aggregate time series data for capital, skilled labour and unskilled labour in the Hungarian economy between 1980 and 2002.