Economic growth and economic development 688

Introduction to Modern Economic Growth Skill premium ET2 endogenous technology demand ET1 endogenous technology demand CT constant technology demand Relative Supply of Skills Figure 15.3 The relationship between the relative supply of skills and the skill premium in the model of directed technical change relative technologies, NH /NL , constant, and thus only features the usual substitution effect The fact that this curve is downward-sloping follows from basic producer theory The curve marked as ET1 applies when technology is endogenous, but the condition in Proposition 15.4, that σ > 2, is not satisfied We know from Proposition 15.3 that even in this case an increase in H/L will induce skill-biased (H-biased) technological change This implies that when H/L is higher than its initial level, the constant-technology demand curve, CT must shift to the right When it is below, CT must shift to the left Consequently, the locus of points that the endogenoustechnology demand, ET1 , is shallower than CT There is an obvious relationship between this result and Samuelson’s LeChatelier principle, which states that longrun demand curves, which apply when all factors can adjust, must be more elastic than the short-run demand curves which hold some factors constant We can think of the endogenous-technology demand curve as adjusting the “factors of production” corresponding to technology However, since in basic producer theory all demand curves must be downward-sloping, even with the LeChatelier principle, the resulting 674