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Changing demand for general skills, technological uncertainty, and economic growth

  • Masashi Tanaka EMAIL logo
Published/Copyright: November 20, 2019
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 20 Issue 1

Abstract

We develop a simple growth model featuring individuals’ choices between general and specific skills, endogenous technological innovation, and a government subsidy for education. The two types of skills differ by their productivity and transferability: general skills are transferable across firms, while each firm-specific skill has a productivity advantage in the firm. Firms face uncertainty in their innovation activities, and the resulting heterogeneity in their labor demand makes the transferability of general skill valuable. We theoretically show that as a country catch up to the world technology frontier, firms invest more in innovation activities. This rises firms’ technological uncertainty and, thus, their demands for general skills increases. As a result, especially in more advanced economies, education subsidies may enhance GDP by increasing the supply of general skills. Using aggregated data for 12 European OECD counties, we calibrate the model and compare the theoretical prediction with the data. In cross-country comparisons, we find that the returns on general skills and the impact of general education expenditure on GDP are higher in countries with higher total factor productivity. These findings support our theoretical argument of the positive relationship between firms’ demand for general skills and countries’ stages of development.

Keywords: distance to world technology frontier; education policy; general and specific skills; technological uncertainty
JEL Classification: J24; O33; O40; I22

Acknowledgement

I would especially like to thank Tatsuro Iwaisako for his invaluable comments and encouragement. I am grateful to Koichi Futagami, Masaru Inaba, Keiichi Kishi, Keigo Nishida, Ryosuke Okazawa, Yoshiyasu Ono, Kouki Sugawara, Katsuya Takii, participants in the DSGE conference 2016 at Ehime University, participants in the workshop on the economics of human resource allocation 2017 at Osaka University, participants in Nagoya Macroeconomics Workshop 2017 at Nagoya Gakuin University.

Appendix

Appendix A: proof of gL,t=0

In this appendix, we prove that gL,t = 0 holds for any equilibrium. Conversely, we assume that gH,t > 0 and gL,t > 0. Then, firms’ demand for general skilled workers is obtained as follows:

gH,t=1γ[−st+(γαwt)11−αaH,t],gL,t=1γ[−st+(γαwt)11−αaL,t].

Using these expressions, the firms’ problem in the first stage can be expressed as follows:

maxst [π{(1−α)(γαwt)α1−αaH,t+1γwtst−12xH,t2}+(1−π){(1−α)(γαwt)α1−αaL,t+1γwtst}−wtst].

The maximization problem is linear in st and, hence, the non-negative constraint gL,t ≥ 0 has to be binding. Thus, we have gL,t = 0.

Appendix B: proofs of Lemma 1 and Proposition 1

From (18), we have that Gt/St>0 requires that

(33)a~t>(1−πγ−π)11−α.

Combining (33) and (20), we have that at−1 must satisfy the following inequality:

(1−πγ−π)α1−α((1−πγ−π)11−α−1)<(1−α)μ2at−12(1+λ)1−αϕ1+α.

Solving the above inequality with respect to at−1 yields

at−1>[(1+λ)1−αϕ1+α(1−α)μ2(1−πγ−π)α1−α{(1−πγ−π)11−α−1}]12≡a^.

Further, in order to guarantee the existence of general skills, a^<1 must hold. Rearranging the condition yields

μ>[(1+λ)1−αϕ1+α1−α(1−πγ−π)α1−α{(1−πγ−π)11−α−1}]12≡μ^.

Appendix C: proof of Proposition 2

From (21), we have that the dynamics of at satisfy dat/dat−1>0, d2at/dat−12>0, and that at=ϕ1+λ>0 when at−1=0. That is, at is increasing and convex in at−1, and has a positive intercept. Thus, the dynamics of at have at most two steady-state points. As shown in the figure below, if two steady-state points exist, the one with a lower value is stable and the larger one is unstable. A condition for the existence of a unique and stable steady state in the interval (0,1] is that at−1≥1 at at = 1. Substituting this condition into (21), and rearranging, yields

μ≤[(1+λ)(1+λ−ϕ)1−α{πγ+ϕ(γ−π)γ(1+λ)(1−πγ−π)11−α}α]12≡μ¯.

Finally, because μ must satisfy μ∈(μ^,μ¯), we have to check whether μ^<μ¯ holds. Substituting μ^ and μ¯ into μ^<μ¯, and rewriting, yields

ϕ1+α{(1−πγ−π)11−α−1}<(1+λ)α(1+λ−ϕ){πγ(γ−π1−π)11−α+ϕ(γ−π)γ(1+λ)}α.

The left-hand side of the above inequality decreases in γ and is equal to 0 when γ → 1. On the other hand, the right-hand side increases in γ and is equal to 0 when γ → π. That is, γ has to be large enough to ensure that μ^<μ¯. From the above discussion, there exists γ^∈(π,1), such that μ^<μ¯ holds for γ∈(γ^,1).

Appendix D

First, we return to the second-stage problem of firms, and resolve gH, t and xi, t. The second-stage problem of type-H firms is as follows:

maxgH,t,xi,t (11+λ)1−α(ϕ+μat−1xi,t)1−α(st+γgH,t)α−wtggH,t−12xi,t2.

The first-order conditions with respect to gH, t and xH, t are, respectively,

(34)gH,t=1γ[−st+(γαwtg)11−αaH,t]

and

xi,t=(1−α)μ1+λ(st+γgH,t)αaH,t−αat−1.

Using the above two first-order conditions, we obtain

xi,t=(1−α)μ1+λ(γαwtg)α1−αat−1.

Then, we have the technology level of type-H firms as

(35)aH,t=11+λ[ϕ+(1−α)μ21+λ(γαwtg)α1−αat−12].

Next, the first-stage problem of firms can be written as

maxst π{(1−α)(γαwtg)α1−αaH,t+1γwtgst−12xH,t2}+(1−π)aL,t1−αstα−wtsst.

Note that πwtg/γ<wts is required for the existence of an interior solution, that is, for the existence of G-skill workers. Combining this condition with (5), we have

(36)γ<wtgwts<γπ.

We focus on the equilibrium that satisfies the condition given in (36), in which both G-skill and S-skill workers exist. Section 5 showed that all estimates obtained from our calibration satisfy (36). Finally, the first-order condition of this problem yields

(37)st=((1−π)γαγwts−πwtg)11−αaL,t.

Rearranging (34) and (37) by evaluating at the steady state and substituting aL,t=ϕ/(1+λ) yields (24) and (25).

Appendix E: proof of Proposition 3

In this appendix, we examine the steady-state characteristics using the system given in (27) and (29). We first show that the steady-state values, g* and a*, increase in S~. Let us denote as g(S~,a∗) the solution of (27) with respect to g*, as a function of a* and S~. From (27), we have that g(S~,a∗) increases in both S~ and a*. Substituting g∗=g(S~,a∗) into (29) yields

(1+λ)a∗−ϕ=(1−α)μ21+λ(1+γ−ππg(S~,a∗))α(a∗)2−α.

Here, a* is determined from the above expression. The left-hand side (LHS) of the above expression is increasing and is a linear function of a* with a negative intercept. At the same time, the right-hand side (RHS) increases in a*, and passes through the origin. However, we cannot examine the number of intersections between the LHS and RHS curves because very little is known about the shape of the RHS function. However, we have that if the LHS and the RHS curves have one or more intersections, the value of the smallest steady-state increases in S~. This means that the smallest steady-state point of a increases in S~ and, thus, it becomes clear that g∗=g(S~,a∗) increases in S~. The steady-state point is described in the figure below.

Next, we investigate the stability of the steady state corresponding to the smallest solution of a*. Let us denote as gt the total number of G-skill workers in equilibrium, but not in the steady state. Then, substituting πgH,t=gt, st=1−gt, and aH,t=at into (34) and (35) yields

(38)gt=πγ[−(1−gt)+(γαwtg)11−αat],

and

(39)at=11+λ[ϕ+(1−α)μ21+λ(γαwtg)α1−αat−12].

Moreover, using (22) together with st = 1 − gt and aL,t=11+λ[at−1+ϕ(1−at−1)], (37) can be rewritten as

(40)(1−gt)=(1−πγνS~(1−gt)−π)11−α(γαwtg)11−αϕ1+λ.

The three endogenous variables, gt, at, and wtg, are determined by (38), (39), and (40). These equations show dat/dat−1>0 for at−1∈[0,1], and that at > 0 when at−1=0.[21] Therefore, the steady state determined by the first intersection of the dynamic equation of at and the 45-degree line is stable, indicating that the dynamics are much the same as those described in Section 3 and in the figure in Appendix C. In the subsequent discussion, we continued the analysis by supposing that economies are on this stable steady state, although we did not prove its uniqueness. Instead of deriving the parameter conditions for the existence and uniqueness of the stable steady state, we confirmed them in the quantitative analysis in Section 5.

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Published Online: 2019-11-20

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https://doi.org/10.1515/bejm-2018-0237
Keywords for this article
distance to world technology frontier; education policy; general and specific skills; technological uncertainty

Articles in the same Issue

  1. Contributions
  2. An empirical study on the New Keynesian wage Phillips curve: Japan and the US
  3. Risk averse banks and excess reserve fluctuations
  4. Advances
  5. Signaling in monetary policy near the zero lower bound
  6. Contributions
  7. Robust learning in the foreign exchange market
  8. Foreign official holdings of US treasuries, stock effect and the economy: a DSGE approach
  9. Discretion rather than rules? Outdated optimal commitment plans versus discretionary policymaking
  10. Agency costs and the monetary transmission mechanism
  11. Advances
  12. Optimal monetary policy in a model of vertical production and trade with reference currency
  13. The financial accelerator and marketable debt: the prolongation channel
  14. The welfare cost of inflation with banking time
  15. Prospect Theory and sentiment-driven fluctuations
  16. Contributions
  17. Household borrowing constraints and monetary policy in emerging economies
  18. The macroeconomic impact of shocks to bank capital buffers in the Euro Area
  19. The effects of monetary policy on input inventories
  20. The welfare effects of infrastructure investment in a heterogeneous agents economy
  21. Advances
  22. Collateral and development
  23. Contributions
  24. Financial deepening in a two-sector endogenous growth model with productivity heterogeneity
  25. Is unemployment on steroids in advanced economies?
  26. Monitoring and coordination for essentiality of money
  27. Dynamics of female labor force participation and welfare with multiple social reference groups
  28. Advances
  29. Technology and the two margins of labor adjustment: a New Keynesian perspective
  30. Contributions
  31. Changing demand for general skills, technological uncertainty, and economic growth
  32. Job competition, human capital, and the lock-in effect: can unemployment insurance efficiently allocate human capital
  33. Fiscal policy and the output costs of sovereign default
  34. Animal spirits in an open economy: an interaction-based approach to the business cycle
  35. Ramsey income taxation in a small open economy with trade in capital goods
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