Working Paper: CEPR ID: DP15724
Authors: Tomas Havranek; Zuzana Irsova; Lubica Laslopova; Olesia Zeynalova
Abstract: A key parameter in the analysis of wage inequality is the elasticity of substitution between skilled and unskilled labor. We question the common view that the elasticity exceeds 1. Two biases, publication and attenuation, conspire to pull the mean elasticity reported in the literature to 1.9. After correcting for the biases, the literature is consistent with the elasticity in the US of 0.6-0.9. Our analysis relies on 729 estimates of the elasticity collected from 76 studies as well as 37 controls that reflect the context in which the estimates were obtained. We use recently developed nonlinear techniques to correct for publication bias and employ Bayesian and frequentist model averaging to address model uncertainty. Our results suggest that, first, insignificant estimates of the elasticity are underreported. Second, because researchers typically estimate the elasticity's inverse, measurement error exaggerates the elasticity, and we show the exaggeration is substantial. Third, elasticities are systematically larger for developed countries, translog estimation, and methods that ignore endogeneity.
Keywords: Elasticity of substitution; Skill premium; Meta-analysis; Model uncertainty; Publication bias
JEL Codes: J23; J24; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| publication bias (C46) | reported elasticity estimates (C51) |
| attenuation bias (D91) | reported elasticity estimates (C51) |
| measurement error (C20) | exaggeration of elasticity estimates (C51) |
| endogeneity (C20) | higher elasticity estimates (C51) |
| reported elasticity estimates (C51) | true elasticity (H30) |
| biases in reporting and estimation methods (C83) | literature's consensus on higher elasticity (D11) |