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Atlanta Fed Working Papers


Capital-Skill Complementarity and Inequality: A Sensitivity Analysis

Linnea Polgreen and Pedro Silos
Working Paper 2005-20
August 2005

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In “Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis,” Krusell et al. (2000) analyzed the capital-skill complementarity hypothesis as an explanation for the behavior of the U.S. skill premium. This paper shows that their model’s fit and the values of the estimated parameters are very sensitive to the data used: Alternative measures of the capital series predict skill premia that bear little resemblance to the data. We also include ten additional years of data to address the claim made by other authors that the evolution of the skill premium changed during the 1990s, but we find little evidence of this change.

JEL classification: C11, C82, E24, J31

Key words: capital-skill complementarity, Bayesian estimation


Beth Ingram, George Neumann, and Charles Whiteman provided invaluable help. In addition, we have received useful comments from Siddhartha Chib, John Geweke, B. Ravikumar, Gianluca Violante, and seminar participants at the University of Iowa and the Midwest Macroeconomics Meetings 2004. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Linnea Polgreen, Department of Economics, University of Iowa, Iowa City, Iowa 52245, 319-335-3797, 319-335-1956 (fax), linnea-polgreen@uiowa.edu, or Pedro Silos, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8630, 404-498-8956 (fax), Pedro.Silos@atl.frb.org.

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