Endogenous Technical Change and Skill Biases in Employment Opportunities

In this paper we present a model that addresses the issue of the uneven distribution ofemployment opportunities over low- and high-skilled workers in a context of skill-biasedendogenous technical change. In our model, technical change consists in part of productinnovation. There is also process innovation to the extent that new products can be producedin two different ways, either using high-skilled workers, or using low-skilled workers afteradapting the production process of a new product. The model combines elements fromKrugman’s (1979) North-South framework, Vernon’s (1966) life-cycle hypothesis andAghion and Howitt’s (1992) work on creative destruction. We show that from a growth pointof view, lowering the relative wages for low-skilled workers does indeed reduceunemployment in the short run, as expected, but it also lowers growth. This is reminiscent ofKleinknecht’s (1998) contention that moderate wage growth makes for slow technical change.economics of technology ;

ICT-Investment, Knowledge Accumulation and Endogenous Growth

In this paper we present an endogenous growth model based on Lucas (1988). We have extended the Lucas model by incorporating ICT-capital next to human capital. We take account of spillovers from ICT use in human capital formation to final output production. The effects on growth of these spillovers depend very much on whether they are external or completely internalised. We find that welfare is positively affected, the stronger these spillovers are, but also the more these spillovers are internalised. In addition, we find that in the case of limited internalised knowledge spillovers, we may face a multiple equilibria steady state growth situation, that has an inherent tendency to select the non-optimum (high growth) equilibrium in which all types of capital are ‘over accumulated’, including ICT-capital. This suggests that there is room for policy intervention here, because there exists an ‘optimum’ value of the knowledge-spillover parameter where both equilibria coincide and over accumulation does not happen.economics of technology ;

A Simple Endogenous Growth Model With Asymmetric Employment Opportunities by Skill

In this paper we present the outlines of an endogenous growth model that focuses on the labour market- and skill-aspects of economic policy measures that may have an impact on technological change, and hence on the long term effectiveness of the policy measures concerned. The link between skills and technology is two-fold. On the one hand, new technology is high-skilled intensive, while on the other hand, process R&D may actively change the skill-mix of existing production technologies in the direction of a more intensive use of least-cost production factors/skills. Hence, we endogenise both product R&D and process R&D decisions. The product R&D generates new varieties of goods with a higher quality than older varieties. New and older varieties are assumed to be imperfect substitutes, so that new varieties only gradually replace older varieties. Process R&D in turn is geared towards downscaling the skill-requirements of the jobs associated with producing the different varieties of output. Because high-skilled labour has different uses (it is an input to final output production, but also into product and process R&D activities), whereas low-skilled labour is used only in final output generation, we can show how various alternative policy measures may affect R&D decisions, hence growth performance, but also the distribution of income between skills. We also show that the promotion of process R&D in particular has beneficial effects both for the employment perspectives of low-skilled workers and for growth in general. In simulation experiments with the model we show that the model, even in its present state, is able to mimic the stylised facts reported by Acemoglu (1997), who observed for the US that an increase in the supply of high-skilled labour does not necessarily imply a fall in the relative wage rate of high-skilled workers in the long run. We show that the ensuing increase in R&D activity creates its own demand for high-skilled workers when new products arrive on the market that are high-skilled intensive during the first phase of their life-cycle, as we assume it to be the case. This in turn invokes endogenous process R&D reactions that change the long term composition of the demand for labour by skill and by sector. In various experiments we found that the model generates an interesting interplay between both types of R&D that may have important consequences for the distribution of income between skills, for growth and more generally for the design of economic policy.economics of technology ;

Investing in Energy Conversion Technologies - An Optimum Vintage Portfolio Selection Approach

The methods by which fuels can be converted into electricity all belong to different “technology families”: the “gas-fired-turbine-family”, the “coal-fired-turbine-family”, etc. Each family consists of different generations of similar technologies, as in a vintage model. Within a family, the latest generation embodies the most recent level and type of knowledge, becoming more and more outdated as new generations arrive. Producers face the problem how to compose their portfolio of families to minimize risk-adjusted costs of investment and production under a given demand constraint. Risk emanates from a number of uncertainties, such as volatile fuel prices and uncertain (prospects of) technological change. The paper presents a model capturing these features by integrating elements from financial Optimum Portfolio Theory (OPT) in a vintage capital investment framework. We find that the cumulative nature of embodied technical change gives rise to investment responses to (changes in) uncertainty that are in between the ‘standard’ results of OPT and Real Option Theory.economics of technology ;

To Be or Not to Be at the BOP: A One-North-Many-Souths Model with Subsistence and Luxury Goods

In this paper we seek to explain the causes and consequences of Northern penetration in Southern subsistence markets in order to reach the countless masses at the Bottom of the (Income) Pyramid. To this end we formulate a One-North-Many-Souths model, inspired by the Krugman (1979) North-South model. In our model, Southern countries are differentiated with respect to population size, but also the degree of internal connectedness as a proxy for the cost involved in reaching the local subsistence market. Northern subsistence goods production in Southern countries takes place under increasing returns to scale, why local production of subsistence goods takes place under constant returns to scale. Using this set-up, we show what kind of Southern countries would be penetrated first, and under which conditions this would happen. From the point of view of Northern producers, Southern countries can be divided into three classes: the broad class of partner- and non partner countries, and within the class of partner countries, the sub-classes of small and large partners. In this context, small partners are so small, that all of local subsistence production is taken over by the North, while in large countries part of subsistence consumption must still be met out of local subsistence production. The main insights coming from numerical simulations with the model are that Northern penetration on Southern markets releases (labor) resources that can then be used for producing tradable luxury goods. This has a negative terms of trade effect for the South, but a positive income effect, while, moreover, the latter effect tends to outweigh the former. In addition, small partner countries generally stand to gain more from Northern penetration than large countries, as in small partner countries relatively more resources would be released when shifting production of subsistence goods from local to Northern technologies. Using numerical simulations in which we increase the rate of imitation, we show that this leads to higher terms of trade for the South, and consequently, a higher penetration of the North in Southern countries with respect to subsistence production. The reason is that the opportunity cost of using Northern labor in Northern luxury goods production falls, and consequently more Northern labor is allocated to its alternative use of managing subsistence goods production in Southern countries. Thus we are able to "explain" the recent penetration of Northern firms in subsistence goods production in countries like India and China (which have become increasingly important as manufacturing trading partners), as the latter countries are both large in population terms as well as relatively well connected.Bottom of the Pyramid, North-South model, luxury goods, subsistence goods

Education and Training in a Model of Endogenous Growth with Creative Destruction

By formulating an endogenous growth model that combines elements from Romer (1990), Aghion and Howitt (1992), and van Zon and Yetkiner (2003), the present paper studies the contribution of education and training on economic growth through their impact on the rate of innovation. The article addresses two main issues. The first is the optimum provision of on-the-job training necessary to be able to adopt, and adapt to new technologies. The second is the impact of both formal education and on-the-job training on the innovative capacity of an economic system that is the ultimate cause of output growth. In our set-up, education enhances R&D activities and lowers adjustment costs to new technologies, thus facilitating their adoption, while on the other hand on-the-job training ensures the possibility to implement the new coming technologies and reap all the related future profits. We assume that the adoption of a new technology consists of two periods, i.e. the training phase during which newly hired workers acquire the right amount of know how in order to become familiar with the specific new technology, and the implementation or production phase in which profit flows arise for firms and in which the cost savings that can be realized arise from productivity increases in the previous phase. By extending the training phase, entrepreneurs run a greater risk of shortening the production phase for a given arrival rate of new technologies that progressively erode the profit flows obtained from existing technologies. The paper shows first that it is possible to find a profit-maximizing, endogenously determined, amount of training that depends on the workers’ educational attainment. Thus, a situation in which better educated workers may be disproportionately selected for training issues is possible, especially in times of rapid technological change. However, the paper also shows that a non-linear relationship between education and technological change (and growth) exists, so that an increase in the formal level of education can even result in a reduction in the rate of growth. The reason for this is the increase in creative destruction that raises ‘technology adoption costs’ in terms of output foregone during re-training spells that arrive at a faster rate. The results offer some insights that are interesting from an education policy perspective.labour economics ;

Random Walks and Non-Linear Paths in Macroeconomic Time Series: Some Evidence and Implications

This paper investigates whether the inherent non-stationarity of macroeconomic time series is entirely due to a random walk or also to non-linear components. Applying the numerical tools of the analysis of dynamical systems to long time series for the US, we reject the hypothesis that these series are generated solely by a linear stochastic process. Contrary to the Real Business Cycle theory that attributes the irregular behavior of the system to exogenous random factors, we maintain that the fluctuations in the time series we examined cannot be explained only by means of external shocks plugged into linear autoregressive models. A dynamical and non-linear explanation may be useful for the double aim of describing and forecasting more accurately the evolution of the system. Linear growth models that find empirical verification on linear econometric analysis, are therefore seriously called in question. Conversely non-linear dynamical models may enable us to achieve a more complete information about economic phenomena from the same data sets used in the empirical analysis which are in support of Real Business Cycle Theory. We conclude that Real Business Cycle theory and more in general the unit root autoregressive models are an inadequate device for a satisfactory understanding of economic time series. A theoretical approach grounded on non-linear metric methods, may however allow to identify non-linear structures that endogenously generate fluctuations in macroeconomic time series.Random Walks, Real Business Cycle Theory, Chaos

On the Persistence of Inequality in the Distribution of Personal Abilities and Income

In this paper we discuss the impact of malnutrition on the distribution of abilities and income in a simple overlapping generations framework. Workers are distributed uniformly over a low-ability and a high-ability range. If workers earn below subsistence wages, the probability that their children will have low abilities is higher than with above subsistence wages due to the malnutrition resulting from low incomes. Using a nested Ethier production function we find that there is an optimal share of low-ability workers in the economy which maximizes output. Due to the intergenerational propagation of low abilities resulting from malnutrition, economies may however get trapped in sub-optimal equilibria with too large shares of low-ability workers. Distributing food coupons financed by taxes of the parent generation to the offspring of these low-ability workers will increase the likelihood that they will be in the high-ability range, permanently increasing output for future generations. Using a numerical example, we show that this type of redistributive policy is welfare improving if the parent generation alive during the initiation of the policy is reimbursed for their loss in utility due to taxes.Income Distribution, Wage Differentials, Skills

On the Role of Education and Training as Drivers of Growth

The paper studies the contribution of human capital on economic growth through its impact on the rate of innovation by formulating an endogenous growth model that combines elements from Romer (1990), Aghion and Howitt (1992), and van Zon and Yetkiner (2003). Using a relatively broad concept of human capital that includes not only formal education but also on-the-job training, the article addresses two main issues. The first one is the optimum provision of firm-specific training necessary to be able to adopt and adapt to new technologies. The second one is the impact of both formal education and on-the-job training on the innovative capacity of an economic system that is the ultimate cause of output growth. In our set-up, general education enhances R&D activities and lowers adjustment costs to new technologies, thus facilitating their adoption, while on the other hand learning and firm-specific training ensure the possibility to implement the new coming technologies and reap all the related future profits. In the first part we assume that the adoption of a new technology consists of two periods, i.e. the learning phase during which newly hired workers acquire the right amount of know how in order to become familiar with the specific new technology, and a production phase in which profit flows arise for firms and in which the cost savings can be realized that arise from productivity increases in the learning phase. By expanding the training phase, entrepreneurs run a greater risk of shortening the production phase for a given arrival rate of new technologies that progressively erode the profit flows obtained from existing technologies. The paper shows first that it is possible to find an optimum, endogenously determined, amount of firm-specific training, that depends on the individuals’ speed in skills acquisition and educational attainment. Thus, a situation in which better educated workers may be disproportionately selected for training issues is possible, especially in times of rapid technological change. However, the paper also shows that an increase in the formal level of education can even result in a reduction of growth because of the increase in ‘technology absorption costs’ in terms of output foregone during re-training spells that arrive at a faster rate. In addition, the paper shows how to calculate the optimum endogenous taxation rate in order to cover the educational expenditures while ensuring the maximum growth rate of innovations. The results achieved finally offer some interesting hints from an education policy perspective.education, on-the-job training, human capital, endogenous growth, wear and tear effect

A ‘putty-practically-clay’ vintage model with R&D driven biases in energy-saving technical change

This paper deals with the problem of tackling the adverse effect of output growth on environmental quality. For this purpose we use an intermediate sector that builds ‘putty-practically-clay’ capital consisting of an energy-raw capital amalgam used for final goods production. The putty-practically-clay model is a strongly simplified version of a full putty-clay model, that mimics all the relevant behaviour of a full putty-clay model, but that does not entail the administrative hassle of a full putty-clay vintage model. In addition to this, we introduce an R&D sector that develops renewable- and conventional energy-based technologies. The allocation of R&D activities over these two uses of R&D gives rise to an induced bias in technical change very much as in Kennedy (1964). In the context of our model, this implies that technological progress is primarily driven by the desire to counteract the upward pressure on production cost implied by a continuing price increase of conventional energy resources. Hotelling’s rule suggests that this price rise is unavoidable in the face of the ongoing depletion of conventional energy reserves. By means of some illustrative model simulations we study the effects of energy policy on the dynamics of the model for alternative policy options aimed at achieving GHG emission reductions. We identify the conditions under which energy policy might partly backfire and present some non-standard policy implications.macroeconomics ;