Skilled Labor Productivity and Cross-Country Income Differences

This paper revisits the question of how allowing for imperfect substitution among workers with different skill levels affects the results of development accounting. We consider a range of models that nest the approaches in the literature and calibrate them to a common set of moments, including particularly evidence on the wage gains of migrants. We obtain two main results. First, human capital accounts for between one-half and three-fourths of cross-country income gaps. Second, human capital accounts for only modest variation in the relative productivity of skilled versus unskilled labor. (JEL E24, E25, J22, J23, J24, J31, J61)