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

≥ 0.

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
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