Introduction to Modern Economic Growth Proposition 15.11 Consider the directed technological change model with no scale effects described above If σ > − λ, then there is strong equilibrium (relative) bias in the sense that an increase in H/L raises the relative marginal product and the relative wage of the H factor compared to the L factor 15.6 Endogenous Labor-Augmenting Technological Change One of the advantages of the models of directed technical change is that they allow us to investigate why technological change might be purely labor-augmenting as required for balanced growth We will see that models of directed technological change create a natural reason for technology to be more labor augmenting than capital augmenting However, under most circumstances, the resulting equilibrium is not purely labor augmenting and as a result, a BGP fails to exist However, in one important special case, the model delivers long-run purely labor augmenting technological changes exactly as in the neoclassical growth model, thus providing a rationale for one of the strong assumptions of the standard growth models In thinking about labor-augmenting technological change, it is useful to consider a two-factor model with H corresponding to capital, i.e., H (t) = K (t) Given the focus on capital, throughout the section we use NL and NK to denote the varieties of machines in the two sectors Let us also simplify the discussion by assuming that there is no depreciation of capital Note also that in this case the price of the second factor, K (t), is the same as the interest rate, r (t), since investing in the capital stock of the economy is a way of transferring consumption from one instant to another Let us first note that in the context of capital-labor substitution, the empirical evidence suggests that an elasticity of substitution of σ < is much more plausible (whereas in the case of substitution between skilled and unskilled labor, the evidence suggested that σ > 1) An elasticity less than is not only consistent with the it available empirical evidence, but it is also economically plausible An elasticity of 688