Directed Technological Change: A Knowledge-Based Model

We develop a knowledge-based growth model to address the issues of directed technological change, wage inequality and economic growth, in which skilled workers are used both in innovation and production. Since skill-biased technological change may lead to a decrease in the average productivity in R&D sectors, scale effect is removed. Free trade between developed countries increases the demand for skilled workers employed in the production of the skill-intensive good, thus promoting skill-biased technological change through the market size e¡èect and an increase in skill premia. In contrast, free trade between developed and developing countries reduces the profits of skill-complementary innovation, since its market is relatively small in the developing country. Thus, international trade may lead to skill-replacing technological change and decrease wage inequality in the developed country. Wage inequality, however, increases in the developing countries since the degree of skill bias of technology in the developing country in the open economy is greater than the one in autarky. Skill-biased technological change has opposite e¡èects on economic growth, therefore trade stimulates economic growth in some circumstances, and hurts it in other circumstances.