Skill biased technical change and misallocation

Due to strict reliance on competitive labor markets, standard approaches which measure skill biased technical change (SBTC) conflate labor market distortions which prevent firms from choosing the efficient ratio between skilled and unskilled labor and ‘true’ SBTC. This contrasts with recent evidence on decoupling between wages and productivity. To overcome this limitation, we present a unified framework to estimate SBTC which accounts for factor accumulation (FA) effects, and quantifies the discrepancy (i.e., relative misallocation) between the wage ratio (skilled to unskilled) and the marginal rate of technical substitution (MRTS).