Publication detail

Skilled and Unskilled Labor Are Less Substitutable than Commonly Thought

Author(s): doc. PhDr. Tomáš Havránek Ph.D., Lubica Laslopova
doc. PhDr. Zuzana Havránková Ph.D., Lubica Laslopova
Mgr. Olesia Zeynalova , Lubica Laslopova
Type: IES Working Papers
Year: 2020
Number: 29
ISSN / ISBN:
Published in: IES Working Papers 29/2020
Publishing place: Prague
Keywords: Elasticity of substitution, skill premium, meta-analysis, model uncertainty, publication bias
JEL codes: J23, J24, J31
Suggested Citation: Havranek T., Irsova Z., Laslopova L. and Zeynalova O. (2020): “Skilled and Unskilled Labor Are Less Substitutable than Commonly Thought” IES Working Papers 29/2020. IES FSV. Charles University
Abstract: A key parameter in the analysis of wage inequality is the elasticity of substitution between skilled and unskilled labor. We question the common view that the elasticity exceeds 1. Two biases, publication and attenuation, conspire to pull the mean elasticity reported in the lit- erature to 1.9. After correcting for the biases, the literature is consistent with the elasticity in the US of 0.6–0.9. Our analysis relies on 729 estimates of the elasticity collected from 76 studies as well as 37 controls that reflect the context in which the estimates were obtained. We use recently developed nonlinear techniques to correct for publication bias and employ Bayesian and frequentist model averaging to address model uncertainty. Our results sug- gest that, first, insignificant estimates of the elasticity are underreported. Second, because researchers typically estimate the elasticity’s inverse, measurement error exaggerates the elasticity, and we show the exaggeration is substantial. Third, elasticities are systematically larger for developed countries, translog estimation, and methods that ignore endogeneity.
Downloadable: wp_2020_29_havranek, irsova, laslopova, zeynalova

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