Capital-skill complementarity and regional inequality: A spatial general equilibrium analysis

This paper employs a large scale numerical spatial general equilibrium model featuring capital-skill complementarities in production to study the distributional implications of a capital-augmenting technological shift across regions and skills groups. Similarly to the existing literature, we find a negative relationship between the labour income share and the capital labour-ratio. Our counterfactual shows that the effects are quite uneven across skills and regions, benefiting mostly high-skilled workers at the detriment of the low and the medium skilled. This is particularly so in more developed regions compared with less developed ones. We show that the effects stem from regional initial conditions, and in particular the regional capital–labour ratio, trade linkages and unemployment rates. •Distributional impact of a capital-augmenting technical change at the regional level.•We incorporate capital-skill complementarity in a CGE model of 230 EU NUTS 2 regions.•The effects depend on regional initial conditions like trade and unemployment rates.