Capital imports composition, complementarities, and the skill premium in developing countries

We study how the composition of capital imports affects relative demand for skill and the skill premium in a sample of developing economies. Capital imports per se do not affect the skill premium; in contrast, their composition does. While imports of R&D-intensive capital equipment raise the ski...

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Bibliographic Details
Published inJournal of development economics Vol. 118; pp. 183 - 206
Main Authors Raveh, Ohad, Reshef, Ariell
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.01.2016
Elsevier Sequoia S.A
Elsevier
Subjects
Capital goods
Capital imports
Capital–skill complementarity
Developing countries
Humanities and Social Sciences
Imports
LDCs
R&D
Research & development
Skill premium
Studies
Tariffs
Trade liberalization
Capital–skill complementarity
Trade liberalization
Capital imports
Skill premium
capital-skill complementarity
trade liberalization
skill premium
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Summary:We study how the composition of capital imports affects relative demand for skill and the skill premium in a sample of developing economies. Capital imports per se do not affect the skill premium; in contrast, their composition does. While imports of R&D-intensive capital equipment raise the skill premium, imports of less innovative equipment lower it. We estimate that R&D-intensive capital is complementary to skilled workers, whereas less innovative capital equipment is complementary to unskilled labor—which explains the composition effect. This mechanism has substantial explanatory power. Variation in tariffs, freight costs and overall barriers to trade, over time and across types of capital, favors imports of skill-complementary capital over other types. We calculate that reductions in barriers to trade increase inequality substantially in developing countries through the composition channel. •Imports of R&D-intensive equipment raise the skill premium in developing economies.•Imports of less innovative equipment lower it, with substantial explanatory power.•Total capital imports per se have no effect on the skill premium.•Capital complementarity patterns can explain these facts.•Reductions in trade barriers increase inequality through import composition channel.
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ISSN:0304-3878
1872-6089
DOI:10.1016/j.jdeveco.2015.07.011