Working Paper Series,
Stockholm University, Swedish Institute for Social Research

Abstract: Income inequality increased in Sweden during the 1980’s and 90’s as did the returns to higher education. The main conclusion of this study is that increased income inequality between high and low skilled workers is demand driven and is due to the presence of capital-skill complementarity in production. Increased investments in new, more efficient capital equipment, together with a slowdown in the growth rate of skilled labor, have raised the ratio of effective capital inputs per skilled worker, which, in turn, has increased the relative demand (and market return) for skilled labor through the capital-skill complementarity mechanism.

Keywords: capital-skill complementarity; inequality; relative wages; skill premium; university wage premium

JEL-codes: J31

30 pages, February 8, 2005

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