We study the determinants of factor shares in a neoclassical environment with capital-skill complementarity and endogenous education. In this environment estimates of the elasticity of substitution between capital and labor that fail to account for human capital levels will be biased upward. We develop a model with overlapping generations, technology-driven neoclassical growth, and ongoing increases in educational attainment. For a class of production functions featuring capital-skill complementarity, a balanced growth path exists and is characterized by an inverse relationship between the rates of capital- and labor-augmenting technological progress and the capital share in national income.

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2 June 2021

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American Economic Review: Insights 3(2) , pp.215-232, 2021

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DOI: 10.1257/aeri.20200350

https://www.aeaweb.org/articles?id=10.1257/aeri.20200350

This Journal article is published under the centre's Trade programme.