Can Skill Biased Technological Progress Have a Role in the Decline of the Savings Rate?

Abstract

This paper explores the consequences of skill biased technological progress on the savings rates. The literature, both theoretical and empirical, on the causes and consequences of skill biased technological progress in the past few years has burgeoned considerably. So has the literature on declining household savings, motivated by the American experience over the past couple of decades. I present a general equilibrium model where declining savings rates emerges as an outcome of exogenously driven skill biased technological progress. The link between the two is attributed to optimizing behavior of altruistic households. In an overlapping generations model, parents are assumed to derive utility from both spending on their children’s education and making monetary transfers (or bequests). I show that increases in the growth rate of skill biased technological change causes a shift in allocations away from bequests in favor of educationleading to a decline in domestic capital accumulation. The analysis is extended to incorporate life cycle savings both under certainty and uncertainty regarding the timing of death.