Economic growth and economic development 675

Introduction to Modern Economic Growth Skill premium Relative supply of skills ω’ ω Relative demand for skills Skill-biased tech change H/L Figure 15.2 The effect of H-biased technological change on relative demand and relative factor prices taking the special form F (L, AH) We will also refer to L-augmenting and Haugmenting technologies as L-complementary and H-complementary Though often equated with factor-augmenting changes, the concept of factorbiased technological change is very different We say that technological change change is L-biased, if it increases the relative marginal product of factor L compared to factor H Mathematically, this corresponds to ∂F (L,H,A)/∂L ∂ ∂F (L,H,A)/∂H ∂A ≥ Put differently, biased technological change shifts out the relative demand curve for a factor, so that its relative marginal product (relative price) increases at given factor proportions (i.e., given relative quantity of factors) Conversely, technological change is H-biased if this inequality holds in reverse Figure 15.2 plots the effect of an H-biased (skill-biased) technological change on the relative demand for factor H and on its relative price, the skill premium These concepts can be further clarified using the constant elasticity of substitution (CES) production function, which we will use for the rest of this chapter The 661