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.