Capital-Skill Complementarity and Balanced Growth

We construct a general equilibrium version of the Krusell et al. Econometrica 68, 1029, 2000 model with capital-skill complementarity. We assume several sources of growth simultaneously: exogenous growth of skilled and unskilled labour, equipment-specific technological progress, skilled and unskilled labour-augmenting technological progress and Hicks-neutral technological progress. We derive restrictions that make our model consistent with balanced growth. A calibrated version of our model can account for the key growth patterns in the US data, including those for capital equipment and structures, skilled and unskilled labour and output, but it fails to explain the long-run behaviour of skilled-labour wages and, consequently, the skill premium.