Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 10-2004: Capital-Skill Complementarity and Rigid Relative Wages

Jan Rose Skaksen and Anders Sørensen
Additional contact information
Jan Rose Skaksen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Anders Sørensen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

Abstract: The relative demand for skills has increased considerably in many OECD countries during recent decades. This development is potentially explained by capital-skill complementarity and high growth rates of capital equipment. When production functions are characterized by capital-skill complementarity, relative wages and employment of skilled labor are countercyclical because capital equipment is a quasi-fixed factor in the short run. The exact behavior of the two variables depends on relative wage flexibility. Relative wages are rigid in Denmark, implying that the employment share of skills should be countercyclical. The labor market is competitive in the United States and therefore relative wages of skilled labor are expected to be countercyclical. We find that the business cycle development of the two economies is consistent with capital-skill complementarity.

Keywords: capital-skill complementarity; relative wages; business cycle

JEL-codes: H00

30 pages, September 8, 2006

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