Capital-Skill Complementarity and Biased Technical Change Across US Sectors

The goal of this paper is two-fold. First, we reexamine the evidence for the capital-skill complementarity (CSC) and the skill-biased technological change (SBTC) hypotheses at the sectoral level in the US economy for the period 1970-2005. Second, we quantify their effect and also the one of input-supply changes on the evolution of the wage skill premium. To do so, we estimate a translog model with four production factors (skilled and unskilled labor, and ICT and non-ICT capital) for different sets of industry aggregates suggested by the literature. Our results imply that SBTC is, on average, the main force opposing the effects on the skill premium of the relative increase in the supply of skilled workers. However, the CSC hypothesis also receives support, and in some sectors, like in financial and business services and in non-manufacturing goods production, CSC plays the most important role at explaining the patterns found in the data. We also find that ICT capital is the main source of CSC, but in some sectors, like non-manufacturing goods, CSC from non-ICT capital is also important. Capital-biased innovation tends, on average, to decrease the skill premium, although its effect is relatively small. Some of our results could also be used to justify more standard specifications of the production function.