Directed Structural Change

This paper extends the existing theories of directed technical change by allowing the factors of production, skilled, and unskilled workers, to be employed in both the skill-intensive and unskilled-intensive sectors. Consequently, the direction of technical progress and the sectoral allocation of factors are jointly determined. The feedback between technical progress and the allocation of factors leads to new results concerning structural change and directed technical change. An increase in the endowment of a factor leads to a dynamic reallocation of factors toward the sector that uses the factor intensively. The reallocation of factors also affects the stability properties of directed technical change. When the parameter conditions necessary for strong bias are satisfied, the interior regime (nonspecialization) is at most locally stable. More importantly, if the relative endowment of skilled labor becomes too high (low), the economy necessarily specializes in the production of skilled (unskilled)-labor-intensive goods. Last, the relationship between the relative endowment of skilled labor and the steady-state relative wage rate is not necessarily monotonic.