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Tradable and nontradable directed technical change

Listed author(s):
  • Óscar Afonso

    ()

    (Universidade do Porto, Faculdade de Economia, OBEGEF, and CEFAGE-UBI.)

  • Tiago Sequeira

    ()

    (Universidade da Beira Interior, Departamento de Gestão e Economia and CEFAGE-UBI)

We wish to reconcile the major trends in wages and the terms of trade using a directed technical change approach in which: (i) tradable and nontradable goods can be substitutes or complements; and (ii) scale eects can be present or can be partially or totally removed. With a lower skilled labor ratio and a higher relative wage in the tradable sector, the price (real exchange rate or terms of trade) mechanism is crucial in determining sectoral productivity dierences and thus wage inequality. Along the balanced growth path (BGP), the real exchange rate can be negatively related with the relative advantage to entry through horizontal innovation and with the relative labor level, depending on scale eects. The wage premium increases due to an increase in the relative labor level in the nontradable sector under substitutability with scale eects or under complementarity without scale eects. A calibrated version of the model indicates that the model replicates closely the data on wages for Germany. Moreover, as substitutability increases, the nontradable technological-knowledge bias, which drives wages, rises, while the nontradable relative price and nontradable value of knowledge decrease.

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Paper provided by University of Evora, CEFAGE-UE (Portugal) in its series CEFAGE-UE Working Papers with number 2017_02.

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Length: 27 pages
Date of creation: 2017
Handle: RePEc:cfe:wpcefa:2017_02
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