Aggregate Elasticity of Substitution between Skills: Estimates from a Macroeconomic Approach

We estimate the elasticity of substitution between high-skill and low-skill workers using panel data from 32 countries during 1970–2015. Most existing estimates, which are based only on US microdata, find a value close to 1.6. We bring international data together with a theory-informed macro-approach to provide new evidence on this important macroeconomic parameter. Using the macro-approach, we find that the elasticity of substitution between tertiary-educated workers and those with lower education levels falls between 1.7 and 2.6, which is higher than previous estimates but within a plausible range. In some specifications, estimated elasticity is above the value required for strong skill-bias of technology, suggesting strong skill-bias is possible.