{
  "title": "The Elasticity of Substitution Between Skilled and Unskilled Labor in Developing Countries: A Directed Technical Change Perspective",
  "publication": "IMF Working Papers, August 11, 2023",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2023/08/11/the-elasticity-of-substitution-between-skilled-and-unskilled-labor-in-developing-countries-537480",
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  "summary": "We develop a model of endogenous skill-biased technical change in developing countries. The endogenous response to a rise in skill supply counters the traditional substitution effect and dampens its role in reducing wage inequality.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Author: Alberto Behar\n- Date: August 11, 2023\n- Type: IMF Working Paper No. 2023/165\n- Core contribution: Develops a model of endogenous skill-biased technical change in developing countries and produces new empirical estimates of the elasticity of substitution between more- and less-educated workers."
    },
    {
      "heading": "Main findings",
      "content": "- The model shows that the endogenous response to a rise in skill supply counters the traditional substitution effect and dampens its role in reducing wage inequality.\n- The model reconciles dispersed existing estimates and re-enforces consensus estimates of the elasticity of substitution between more/less educated workers.\n- The model rationalizes estimates that were previously deemed implausible or model-inconsistent.\n- New empirical estimates:\n  - Using a novel global panel, the elasticity of substitution is found at or just above 2.\n  - Using Latin American data that facilitates analysis of dynamics, estimates are reduced to 1.7-1.8."
    },
    {
      "heading": "Methodology and data",
      "content": "- The paper develops a theoretical model of endogenous skill-biased technical change tailored to developing country contexts.\n- Empirical strategy includes:\n  - A novel global panel covering developing countries (details in the paper).\n  - A Latin American dataset enabling dynamic analysis, which yields lower elasticity estimates (1.7-1.8)."
    },
    {
      "heading": "Implications for inequality, growth, and policy",
      "content": "- The elasticity of substitution parameter is crucial for understanding:\n  - Wage inequality and the skill premium.\n  - Growth accounting and broader macroeconomic dynamics in developing countries.\n- Key implication: Endogenous directed technical change mitigates the mechanical effect of rising skill supply on reducing wage inequality, altering how policy and projections should interpret changes in skill composition.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2023/08/11/the-elasticity-of-substitution-between-skilled-and-unskilled-labor-in-developing-countries-537480"
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    "Authors: Alberto Behar",
    "Published: August 11, 2023",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798400250514.001",
    "Author: Alberto Behar",
    "Date: August 11, 2023",
    "Type: IMF Working Paper No. 2023/165",
    "Core contribution: Develops a model of endogenous skill-biased technical change in developing countries and produces new empirical estimates of the elasticity of substitution between more- and less-educated workers.",
    "The model shows that the endogenous response to a rise in skill supply counters the traditional substitution effect and dampens its role in reducing wage inequality.",
    "The model reconciles dispersed existing estimates and re-enforces consensus estimates of the elasticity of substitution between more/less educated workers.",
    "The model rationalizes estimates that were previously deemed implausible or model-inconsistent.",
    "New empirical estimates:",
    "The paper develops a theoretical model of endogenous skill-biased technical change tailored to developing country contexts.",
    "Empirical strategy includes:",
    "The elasticity of substitution parameter is crucial for understanding:",
    "Key implication: Endogenous directed technical change mitigates the mechanical effect of rising skill supply on reducing wage inequality, altering how policy and projections should interpret changes in skill composition.",
    "**Working Paper**"
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