## The Elasticity of Substitution Between Skilled and Unskilled Labor in Developing Countries: A Directed Technical Change Perspective

_IMF Working Papers, August 11, 2023_

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**Canonical URL:** [The Elasticity of Substitution Between Skilled and Unskilled Labor in Developing Countries: A Directed Technical Change Perspective](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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## Bibliographic details
- Authors: Alberto Behar
- Published: August 11, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400250514.001

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### Overview
- 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.

### Main findings
- 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:
  - Using a novel global panel, the elasticity of substitution is found at or just above 2.
  - Using Latin American data that facilitates analysis of dynamics, estimates are reduced to 1.7-1.8.

### Methodology and data
- The paper develops a theoretical model of endogenous skill-biased technical change tailored to developing country contexts.
- Empirical strategy includes:
  - A novel global panel covering developing countries (details in the paper).
  - A Latin American dataset enabling dynamic analysis, which yields lower elasticity estimates (1.7-1.8).

### Implications for inequality, growth, and policy
- The elasticity of substitution parameter is crucial for understanding:
  - Wage inequality and the skill premium.
  - Growth accounting and broader macroeconomic dynamics in developing countries.
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2023/08/11/the-elasticity-of-substitution-between-skilled-and-unskilled-labor-in-developing-countries-537480_