Rising Skill Premium?: The Roles of Capital-Skill Complementarity and Sectoral Shifts in a Two-Sector Economy∗

Empirical studies report a marked dispersion in skill-premium changes across economies over the past few decades. Early studies successfully replicate the increases in skill premiums in many economies, while some other cases with a decline in the skill premium are yet to be explained. To this end, we develop a two-sector (i.e., manufacturing and nonmanufacturing) general equilibrium model with skilled and unskilled labor, in which degrees of capital-skill complementarity differ across sectors. Based on the estimated structural parameters, we show that a decline in capital-skill complementarity in the non-manufacturing sector can provide a consistent explanation for the following aspects of the Japanese data at both the aggregate and industry levels: (i) a decline in the skill premium, (ii) widening of the sectoral wage gap due to a rise in manufacturing wages and decline in non-manufacturing wages, and (iii) an increase in the unskilled labor share in the non-manufacturing sector. We interpret that this change reflects compositional effects within non-manufacturing and provide supporting evidence based on the industry-level data.