Introduction to Modern Economic Growth Skill premium Initial premium Long-run relative demand for skills Long-run premium Short-run Response Exogenous Shift in Relative Supply Figure 15.5 Dynamics of the skill premium in response to an increase in the relative supply of skills, with a downward-sloping endogenous-technology relative demand curve when σ > In the context of substitution between skilled and unskilled workers, an elasticity of substitution much higher than is unlikely Most estimates put the elasticity of substitution between 1.4 and One would like to understand whether σ > is a feature of the specific model discussed here and how different assumptions about the technology of production or the innovation possibilities frontier affect this result This issue will be discussed in Section 15.4 Second, we would like to understand the relationship between the market size effect and the scale effects, in particular, whether the results on induced technological change are an artifact of the scale effect (which many economists not view as an attractive feature of endogenous technological change models) Section 15.5 shows that this is not the case and exactly the same results apply when scale effects are removed Third, we would like to apply these ideas to investigate whether there are reasons for technological change to be endogenously labor-augmenting in the neoclassical growth model This will be investigated in Section 15.6 Finally, it is also useful to 679