Twin Engines of Growth

We develop an endogenous growth model in which new technology and new skills are bounded complements — they complement each other up to a point, but beyond this the impact of each factor is constrained by the level of the other. As a result, both technological progress and human capital accumulation are necessary for sustained productivity growth, but neither alone is sufficient. Rapid technological progress generates increased returns to education and encourages each generation to spend more time in school. Rapid human capital accumulation increases the feasibility and profitability of innovation and encourages the private business sector to allocate more resources towards R&D. Our model has important implications for the effectiveness of alternative growth–promoting policies, for the interpretation of the empirical relationship between growth and schooling, and for the relationship between growth and intergenerational wage dispersion.