Economic growth and economic development 692

Introduction to Modern Economic Growth Skill premium Long-run premium Initial premium Long-run relative demand for skills Short-run Response Exogenous Shift in Relative Supply Figure 15.4 Dynamics of the skill premium in response to an exogenous increase in the relative supply of skills, with an upward-sloping endogenous-technology relative demand curve If on the other hand we have σ < 2, the long-run relative demand curve will be downward sloping, though again it will be shallower than the short-run relative demand curve Following the increase in the relative supply of skills there will again be an initial decline in the college premium, and as technology starts adjusting the skill premium will increase But it will end up below its initial level To explain the larger increase in the college premium in the 1980s, in this case we would need some exogenous skill-biased technical change Figure 15.5 draws this case Consequently, a model of directed technological change can shed light both on the secular skill bias of technology and on the relatively short-run changes in technology-induced factor prices We will study other implications of these results below However, before doing this a couple of further issues need to be discussed First, Proposition 15.4 shows that upward-sloping relative demand curves arise only 678