The Direction of Technical Change and Economic Growth

Massachusetts Institute Of Technology, Cambridge MA

Investigators

Abstract

There is widespread agreement that technical progress is the engine of economic growth. Despite a large literature investigating determinants of technical progress, there is relatively little work on what factors shape the incentives to develop different types of technologies. For example, the general consensus among economists is that technical change throughout the past two centuries has been labor-augmenting, in the sense that it increased the productivity of labor more than that of capital. Similarly, technical change appears to have been skill-biased at least for the past 50 years, in the sense that it has benefited skilled and educated workers more than unskilled and less educated workers. Despite these well-established patterns, we know little about the reasons why technological developments have taken these particular forms. This project investigates the incentives for firms and the society to develop and implement different types of technologies. It demonstrates that the size of the markets that technologies command and relative factor prices shape these incentives: there will be more effort devoted to develop technologies that save on more expensive factors and command a greater market size. It shows how these factors explain the broad patterns we observe in the data. The project draws implications for this type of technical change for cross-country income differences. For example, skill-biased technical change will increase the income gap between rich countries that are abundant in skilled workers and poor countries that are scarce in skilled workers. Similarly, depending on how substitutable capital and labor-intensive products are, labor-augmenting technical change may also increase this gap. The project also investigates how differences in the scarcity of labor may affect the growth rate of the economy, and offers an explanation for why countries with greater labor scarcity may have been the first ones to industrialize during the 19th century.