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Any serious empirical study of factor substitutability has to allow the data to display complementarity as well as substitutability. The standard approach reflecting this idea is a translog specification - this is also the approach used by numerous studies analysing the relative capital-skill complementarity hypothesis formulated by Griliches (1969). According to this hypothesis, the degree of substitutability between skilled labour and capital is lower than that for unskilled labour and capital. Yet, the results of empirical studies investigating this hypothesis are controversial. This paper offers a straightforward explanation: using a translog approach reduces the issue of factor substitutability or complementarity to a question of cost shares. Our review of translog studies mentioned in Hamermesh's (1993) summary on the demand for heterogeneous labour demonstrates that this argument is empirically relevant - all these studies can be reconciled with each other on the basis of the cost-share argument.
Any serious empirical study of factor substitutability has to allow the data to display complementarity as well as ... Show Full Abstract
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Authors: Frondel, Manuel; Schmidt, Christoph M. Corporate authors: Institute for the Study of Labour (Germany) (IZA) Date: 2001 Resource type: Paper Series name: IZA discussion paper Subjects: Finance; Employment; Labour market; |
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