Capital–Skill Complementarity: Does Capital Composition Matter?

Abstract

We estimate the effect of capital composition on the size of capital–skill complementarity and the skill wage premium. Disaggregating the capital stock into different types according to technological content, we find that: capital is more of a q‐complement to skilled labor than to unskilled labor; the higher the technological component of capital, the larger the size of the relative q‐complementarity between capital and skilled labor; and replacing non‐technological with technological capital might increase the skill wage premium by about 9 percent. Our results highlight that changes in capital composition matter for understanding changes in the skill wage premium.