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Economics Letters

Rejecting Capital-Skill Complementarity at all Costs

According to Griliches [Review of Economics and Statistics 51 (1969) 465], the degree of substitutability between skilled labor and capital is lower than that for unskilled labor and capital. Yet, the results of empirical studies investigating this hypothesis are controversial. This paper offers a straightforward explanation for at least the divergent results of translog studies: Using a static translog approach reduces the issue of factor substitutability or complementarity to a question of cost shares. Our review of static translog studies demonstrates that our cost–share argument seems to be empirically relevant.

Frondel, M. and C. Schmidt (2003), Rejecting Capital-Skill Complementarity at all Costs. Economics Letters, 80, 1, 15-21