Will the skill-premium in the Netherlands rise in the next decades?

Abstract

While the skill-premium has been rising sharply in the US and the UK for 20 years, the Dutch skill-premium decreased for much of that period and only started to rise in the early 90s. In this article, we investigate whether the Dutch skill-premium will rise in the next decades. To answer this question, we forecast the skill-premium using the Katz and Murphy (1992) and the Krusell et al. (2000) models. The Katz and Murphy model (KM) explains demand shifts by skill-biased technological change in unobservable variables captured by a time trend. In contrast, the Krusell et al. model (KORV) explains demand shifts by (observable) changes in the capital stock under a capital-skill complementarity technology. The results show that while the KM model predicts that the skill-premium will have increased by 30% in 2020, based on realistic predictions of the stock of capital, the KORV model predicts that the skill-premium will remain between −5 and +5% of its 1996 level.

Acknowledgments

I would like to thank Lex Borghans, Frank Cörvers, Bart Golsteyn, Ben Kriechel, Philip Marey, Christophe Meng, Catherine Morrison Paul, Inge Sieben, Wendy Smits and Bas ter Weel for helpful comments on earlier drafts.

Notes

¹ A third explanation put forward in the literature is the increasing international trade. However, several arguments (e.g. same timing in the trade and nontrade sectors) against this explanation are raised (Johnson, 1997; Acemoglu, 2002). A fourth explanation put forward is the institutional change (DiNardo et al., 1996; Lee 1999). Acemoglu (2002) raises serious arguments against this explanation. Regarding the minimum wage: the decrease of the minimum wage cannot explain the rise in wage dispersion observed above the median of the wage distribution. Regarding the unions: wrong timing of deunionization and wage inequality, and inconsistancy between the unionization and rising wage inequality in Canada through the 70s and 80s.

² See, e.g. Rosen (1968), Griliches (1969), Grant (1979) and Hamermesh (1993).

³ The explanation of increasing skill premium by the capital-skill complementarity has often been rejected because of its apparent inconsistency with a constant share of capital in the economy. However, though an aggregate production function with a unitary elasticity of substitution between capital and labour (aggregate of skilled and unskilled labour) ensures the constancy of the share of capital, there are more flexible forms of aggregate production function satisfying the postulate of the constant share of capital. Indeed, a production function with a greater-than-unity elasticity of substitution accompanied by a labour augmenting technological change would be consistent with constant shares of labour and capital, see e.g. Brown and De Cani (1963), Kennedy (1964), David and van de Klundert (1965), Sato (1970) and Yuhn (1991).

⁴ See CPB (2004).

⁵ The data can be obtained from the author's website, http://www.fdewb.unimaas.nl/roa. More recent data was not available at the time the analyses were done.

⁶ Other plausible rates of depreciation did not alter the results significantly.

⁷ The labour series and wage series we use are simply obtained by aggregating l _u  = l _pr  + l _se for unskilled labour (where l _pr and l _se are respectively the number of man-year with primary and secondary education and weighting w _u  = (l _prw _pr  + l _sew _se )/l _u for the unskilled wage.

⁸ The CPB (2004) forecasts a moderate growth in the stock of capital of 1.6% per year through 2010. In this article, we extrapolate this forecasts to 2020. Note that this scenario is realistic at sight of the recent decrease in firms’ investments, observed in the Netherlands, −12% between 2000 and 2004.