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
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