How does the efficiency of skilled labor vary across rich and poor countries? An analysis using industry and trade data
Hannes Malmberg, IIES Stockholm University
This paper estimates the relative efficiency of skilled and unskilled workers across countries using a new method that relies on disaggregated industry and trade data. I document that the share of exports in skill-intensive industries rises sharply with income levels. Interpreted through the lens of a gravity model, this pattern suggests that rich countries have low relative unit production costs in skill-intensive industries. For standard trade elasticities, the implied differences in the effective costs of skilled labor services across countries cannot be rationalized by differences in the skilled wage premia, which leads me to infer that skilled labor is relatively efficient in rich countries compared to in poor countries. Integrating these findings into a development accounting exercise for the manufacturing sector, I find that accounting for skill-specific efficiency differences reduces the size of skill-neutral labor efficiency differences: the difference in skill-neutral TFP differences between rich and poor countries in manufacturing falls from a factor of 4.3 to a factor of 2.6.