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2003. augusztus 22. Tarjáni Hajnalka: The impact of skill biased technology change on input demand in Hungary



2003 augusztus 22.

Tarjáni Hajnalka (Monash University)

The impact of skill biased technology change on input demand in Hungary

Recent changes in the distribution of income have drawn significant attention to the changing relationship between factors of production. Their relationship reflects the characteristics of the underlying technology in the aggregate production function. As a result of technological advancement the degree of substitutability between the factors of production may change. Through the estimation of substitution elasticities effects of technological change on factor demands and rewards can be analysed.

The focus of this paper is on the changing position of skilled labour relative to unskilled labour. A popular explanation offered by the literature is the concept of skill biased technological change (SBTC). According to this, the implementation of new technologies entails increased demand for skilled labour, as better-educated workers are required to operate new vintages of equipment. Therefore technological change is biased in favour of the use of skilled labour and is claimed to be the main reason for increasing wage inequality. The two most important mechanisms identified as potential sources of SBTC are increased trade and capital-skill complementarity.

Capital-skill complementarity can be directly examined through the estimation of the degree of substitutability between the factors of production. This paper presents an attempt to derive the partial Allen-substitution elasticities and price elasticities for capital, skilled labour and unskilled labour. Substitution elasticities are estimated using a three-factor translog cost function. The main advantage of using such a simple flexible form is that it does not require any a priori restrictions and assumptions on the possible relationship between the factors of production. However, there are a number of difficulties associated with the translog functional form. For meaningful results parameter estimates and substitution elasticities derived from them need to fulfil some important criteria on concavity and monotonicity. Since parameters from the first estimation in the paper fail them, reparametrisation of the estimated system of equations becomes necessary.

The estimation is based on aggregate time series data for the Hungarian economy between 1980 and 2002. Besides estimates based on the full sample, elasticities are also estimated for a shorter time period to account for the effects of data quality on the results. Results from the estimation of the 1992- 2002 sample are more comparable to other studies in the literature based on similar sample periods and methods.

Results of the estimation reject absolute capital-skill complementarity, however skilled labour and capital are found to be relative complements as the elasticity of substitution is significantly lower between capital and skilled labour than for capital and unskilled labour. This suggests that the technology implemented in the observed period was skill biased and changes in the capital stock increased demand and wages of skilled labour relative to unskilled labour.