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GTAP Resources: Frequently Asked Question Details

Subject: FAQ

Question: IN GTAP4 and GTAP5 labor endoments and labor payments are distinguished accoring to skill level.
Firms' production functions are CES in primary factors. However, there, the distinction seems to be only between capital, labor and land.

I cannot understand whether
1) labor enters as a homogenous factor into the production function, with imperfect substitution with capital and land, or if
2) skilled and unskilled labor are imperfect substituted between themselves, with a substitution elasticity that is the same as that between capital and land.

If the answer is 1), then it should be that skilled and unskilled labor are perfect substitutes. But then, their earnings shuld be the same, whereas they are not in GTAP.

Can you please help me to find an answer to these questions? I read the book, Ch. 18 of the GTAP4 database manual, GTAP Technical Paper n. 11 but I could not fully answer them.


In the standard GTAP model, skilled labor, unskilled labor, capital, land and natlres, are all in the same CES nest with the same substitutability between each other. This elasticity of substitution varies by commodity but a similar value applies to each broad commodity group, i.e. primary agriculture, processed food, extractive sectors, manufacturing, and services. Land is used only by the primary agricultural commodities while NatlRes is used only by the extractive sectors.


Date Added: 4/26/2001