Endogenous Technical Change and Skill Biases in Employment Opportunities by

In this paper we present a model that addresses the issue of the uneven distribution of employment opportunities over lowand high-skilled workers in a context of skill-biased endogenous technical change. In our model, technical change consists in part of product innovation. There is also process innovation to the extent that new products can be produced in two different ways, either using high-skilled workers, or using low-skilled workers after adapting the production process of a new product. The model combines elements from Krugman’s (1979) North-South framework, Vernon’s (1966) life-cycle hypothesis and Aghion and Howitt’s (1992) work on creative destruction. We show that from a growth point of view, lowering the relative wages for low-skilled workers does indeed reduce unemployment in the short run, as expected, but it also lowers growth. This is reminiscent of Kleinknecht’s (1998) contention that moderate wage growth makes for slow technical change.