Human Capital and Development Accounting Revisited

Development accounting exercises generally assume that skilled and unskilled labor services are perfect substitutes. However, it is known that if labor services are imperfectly substitutable, this assumption might lead to an overestimation of uniform efficiency differences, and an underestimation of skilled labor efficiency differences. To quantify the importance of this mechanism, one needs to estimate the efficiency-adjusted relative price of skilled and unskilled labor services across countries. In this paper, I develop a method to estimate this relative price using data on international manufacturing exports. My method exploits the negative relationship between relative prices of skilled labor services and relative export values in skill-intensive industries. Depending on the assumed trade elasticity, the relative efficiency-adjusted price of skilled and unskilled labor services is 5-30 times lower in rich countries compared to in poor countries, with an estimated 9 times difference for the middle of the range of trade elasticities. When I use these estimates to decompose productivity differences in manufacturing, TFP differences in manufacturing falls from a factor of 4.3 to a factor of 2.0-3.0. Instead, skilled labor efficiency differences become more important. Under an assumption of neutral technology differences, like in traditional development accounting, the skilled labor efficiency differences reflect human capital quality differences. If the assumption of skill-neutral technology differences is relaxed, an alternative explanation is that there are large skill-biased technology differences between rich and poor countries. ∗I am grateful to Timo Boppart, Axel Gottfries, John Hassler, Karl Harmenberg, Per Krusell, Erik Öberg, and Torsten Persson for extensive comments on the project. Moreover, I am grateful for helpful discussions with Ingvild Almås, Konrad Burchardi, Saman Darougheh, Niels-Jakob Harbo Hansen, Loukas Karabarbounis, David Lagakos, Bo Malmberg, Kurt Mitman, Jon de Quidt, Jósef Sigurdsson, Lena Sommestad, and David Strömberg, as well as for helpful suggestions during interviews, meetings, and seminars during my job market. †Graduate student. Institute for International Economic Studies. Email: [email protected].