Directed Technological Change & Cross-Country Income Differences: A Quantitative Analysis

Abstract

The first step in understanding international income differences is measuring supplies of various factors of production and their productivity. Recent work suggests that these calculations should treat workers of different skill levels as imperfect substitutes. However, under this approach, it has been challenging to compute skill-specific productivity levels for a large sample of economies. In this paper, we use a model of endogenous directed technological change together with a new data set on labor force composition to construct measures of productivity for workers in three distinct skill categories for 68 countries over the period of 1910 - 2010. We find that rich countries use labor of all skill categories more efficiently; however, in the absence of a technology adoption wedge, poor countries would, in fact, be more efficient than developed economies at using low-skill labor. This depressed low-skill productivity is responsible for large output loses. Our estimates also imply that after 1950 the world technology frontier expanded much faster for college-educated workers than for those with lower skill sets. This technology diffused to many countries, allowing even the less developed ones to experience a relatively robust growth of high-skill-specific productivity. Their GDP growth failed to reflect that because they have very few workers in the higher skilled category.