Endogenous Growth, Division of Labor and Fiscal Policy

Abstract

Based on a critical appraisal of the New Growth Theory — i.e. the human capital and the R & D approach — we develop policy options based on a simple model of endogenous growth with two main deviations from existing literature: first, endogenous growth is based on the division of labor. The engine of growth is the worker’s incentive to achieve higher income, thereby inducing an increase in the degree of specialization. Second, we emphasize that both supply- and demand-side policies are apt to foster economic growth, and do not only induce level shifts. On the supply side, an increase in productivity of innovative workers, alongside with investment in infrastructure, human capital, and improvements in the market setting may stimulate growth. On the demand side, we find transfers to innovative workers, a reduction in consumption taxes, and an increase of labor income taxation of the specialized workforce.