Interaction Between Endogenous Human Capital and Technological Change

Abstract

This paper examines how interaction between endogenous human capital accumulation and technological change affects relative wages and economic growth. Private incentives to invest in human capital finance the employment of skilled labour in the education sector, while non-rival technology is a by-product of the education process. The absorption of new technologies into production is skill intensive, creates skill-biased labour demand, and increases the relative wage of skilled to unskilled labour. In contrast to recent models of endogenous growth, higher rates of technological change and growth may be accompanied by a higher relative wage but lower relative supply of skilled labour. Thus the model provides a theoretical foundation for the empirically observed relation between technological change and relative demand, supply and wages of skilled labour. I. INTRODUCTION Rapid change in technology in the 1980's was associated with a sharp rise in the relative wage and a decline in the relative supply of skilled labour. Models of endogenous technological change imply, however, that higher rates of innovation should be associated with more skilled labour and lower relative wages.' These models focus on private incentives to innovate, but assume that human capital is either exogenous or accidental (learning by doing).2 Thus, the literature provides few insights into how endogenous technological change influences private incentives to accumulate human capital through relative wage movements. This paper has two key elements that allow for interaction between endogenous technological change and the relative supply, demand, and wage of skilled labour. First, the two production sectors in the model differ not only in their skill-intensity, but also in technological sophistication. This generates strong skill-biased labour demand and higher relative wages in response to higher rates of technological change. Second, skilled labour is assumed to be an essential input in education, research, and in the absorption of innovations into production. The absorption of bursts in technological change then requires the withdrawal of skilled labour from research and education which subsequently increases the costs of both human capital investment and innovation. We term the resulting leveraging of the future rate of technological change and human capital the absorption effect.