Capital-Skill Complementarity and Inequality in Swedish Industry

Income inequality has been increasing in Sweden for more than two decades. Since 1981, the skill premium has risen by 20 percent for the economy as a whole and by as much as 30 percent for men working in the private sector. At the same time, the supply of skilled workers has grown by 20 percent. Given this increase in the supply of skilled labor, why has Sweden experienced such a prolonged increase in income inequality between skilled and unskilled workers? This question is examined here in a neoclassical growth framework using data from Swedish industry. The main finding of this study is that the rise in income inequality in Swedish industry is being driven by capital-skill complementarity. Increased investments in new capital equipment, together with a higher rate of capital utilization and a slowdown in the growth rate of skilled labor, have raised the ratio of effective capital inputs per skilled worker, which, in turn, has increased the relative demand for skilled labor through the capital-skill complementarity mechanism.