One of the driving factors in setting prices is understanding the issue of substitutes. Jones, B (2014), “The Human Capital Stock: A Generalized Approach”, American Economic Review 104 (11), 3752-3777.

But most development accounting calculations are based on a counterfactual model of aggregate human capital where skilled and unskilled workers are perfect substitutes. Jones's result must therefore be driven by the relative-efficiency effect which, as Caselli and Coleman show, is large for plausible values of the elasticity of substitution between different skills.

Surely, white bread would serve the function of a bun, but unless you really don't care much for a good hamburger, it simply would not do as a perfect substitute. Imperfect substitutes. CEPR Advanced Forum in Financial Economics, CEPR Household Finance Seminar Series - The Housing Wealth Effect: Quasi-Experimental Evidence, European Research Workshop in International Trade (ERWIT) 2020, Homeownership of immigrants in France: selection effects related to international migration flows, Climate Change and Long-Run Discount Rates: Evidence from Real Estate, The Permanent Effects of Fiscal Consolidations, Demographics and the Secular Stagnation Hypothesis in Europe, QE and the Bank Lending Channel in the United Kingdom, Independent report on the Greek official debt, Rebooting the Eurozone: Step 1 – Agreeing a Crisis narrative. In other words, he turns the cross-country variation in wages not explained by the relative supply of workers with different skills into an estimate of the human capital embodied in skilled workers. Weil 2007, Hanushek and Woessmann 2012). So, if some workers become skilled, this has no impact on the marginal productivity of other participants in the labour force.

“Cultural Values and Productivity”, unpublished, LSE.
Jones’s finding is clearly very striking in light of the previous consensus of a relatively modest role for human capital in accounting for international income gaps. Under fairly standard ‘neoclassical’ conditions, this is also the increase in human capital associated with an extra year of schooling. That is why informal finance and microfinance are imperfect substitutes. Jones finds that defined like this, human capital has the potential to explain the totality of the variation in income across countries.2. He estimates country of origin-specific skill premia for immigrants in the US. Research-based policy analysis and commentary from leading economists, Imperfect substitution and development accounting, Francesco Caselli, Antonio Ciccone 09 June 2018. I show sufficient conditions for a discrete-choice demand system to yield demand for each product which is log-concave in price, and has log-increasing differences in own and another product’s price, leading to strong comparative statics results. Hence, if a group of workers becomes skilled, this has implications for the marginal productivity of workers who remain unskilled as well as workers who were already skilled. A long labour economics tradition, however, shows convincingly that workers with different skills are imperfect substitutes (Hamermesh 1993, Katz and Autor 1999, Ciccone and Peri 2005). The economics of insurance and its borders with general finance, Maturity mismatch stretching: Banking has taken a wrong turn.

Labour economists estimate that an extra year of schooling delivers an increase in wages of about 10%.
Given that the relatively supply of skills varies enormously between rich and poor countries, for plausible values of the elasticity of substitution between skilled and unskilled workers we would expect to observe college premia that are much higher in poor countries than in rich ones. Ilzetzki, E, and S Simonelli (2018).

But the thing is, I didn't need 'that' photo, I just needed 'a' photo. This evidence does not contradict the evidence in Rossi, or our more general discussion. We also show that this is true no matter what the pattern of complementarity/substitutability among different types of skilled workers may be. Over the last 20 years, several researchers have developed and refined a set of tools, now known as development accounting, that has allowed – among other things – a quantitative evaluation of the hypothesis that human capital is a major driver of the large gaps in income we observe around the world. They are quite close to perfect substitutes, so take the cheap one.


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