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.