14.452 Fall 2016 Lecture 12-13: Directed Technological .

14.452 Economic Growth: Lectures 12 and 13, DirectedTechnological Change and ApplicationsDaron AcemogluMITDecember 8 and 13, 2016.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.1 / 89

Directed Technological ChangeIntroductionIntroductionThus far have focused on a single type of technological change (e.g.,Hicks-neutral).But, technological change is often not neutral:12Benefits some factors of production and some agents more than others.Distributional effects imply some groups will embrace new technologiesand others oppose them.Limiting to only one type of technological change obscures thecompeting effects that determine the nature of technological change.Directed technological change: endogenize the direction and bias ofnew technologies that are developed and adopted.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.2 / 89

Biased Technological ChangeImportanceSkill-biased technological changeOver the past 60 years, the U.S. relative supply of skills has increased,but:12there has also been an increase in the college premium, andthis increase accelerated in the late 1960s, and the skill premiumincreased very rapidly beginning in the late 1970s.Standard explanation: skill bias technical change, and an accelerationthat coincided with the changes in the relative supply of skills.Important question: skill bias is endogenous, so, why hastechnological change become more skill biased in recent decades?Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.3 / 89

Biased Technological ChangeImportanceSkill-biased technological changeCollege wage premiumRel. supply of college skillsC ol l ege w age pr em i um.6.5.4.4.2.3R el . s uppl y of c ol l ege s k i l l s.8.6039495969year798996Figure: Relative Supply of College Skills and College PremiumCourtesy of Princeton University Press. Used with permission.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.4 / 89

Biased Technological ChangeImportanceUnskill-biased technological changeLate 18th and early 19th unskill-bias:“First in firearms, then in clocks, pumps, locks, mechanical reapers,typewriters, sewing machines, and eventually in engines and bicycles,interchangeable parts technology proved superior and replaced theskilled artisans working with chisel and file.” (Mokyr 1990, p. 137)Why was technological change unskilled-biased then andskilled-biased now?Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.5 / 89

Biased Technological ChangeImportanceWage push and capital-biased technological changeFirst phase. Late 1960s and early 1970s: unemployment and share oflabor in national income increased rapidly continental Europeancountries.Second phase. 1980s: unemployment continued to increase, but thelabor share declined, even below its initial level.Blanchard (1997):Phase 1: wage-push by workersPhase 2: capital-biased technological changes.Is there a connection between capital-biased technological changes inEuropean economies and the wage push preceding it?Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.6 / 89

Biased Technological ChangeImportanceImportance of Biased Technological Change: moreexamplesBalanced economic growth:Only possible when technological change is asymptoticallyHarrod-neutral, i.e., purely labor augmenting.Is there any reason to expect technological change to be endogenouslylabor augmenting?Globalization:Does it affect the types of technologies that are being developed andused?Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.7 / 89

Biased Technological ChangeImportanceDirected Technological Change: Basic Arguments ITwo factors of production, say L and H (unskilled and skilledworkers).Two types of technologies that can complement either one or theother factor.Whenever the profitability of H-augmenting technologies is greaterthan the L-augmenting technologies, more of the former type will bedeveloped by profit-maximizing (research) firms.What determines the relative profitability of developing differenttechnologies? It is more profitable to develop technologies.12when the goods produced by these technologies command higher prices(price effect);that have a larger market (market size effect).Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.8 / 89

Biased Technological ChangeImportanceEquilibrium Relative BiasPotentially counteracting effects, but the market size effect will bemore powerful often.Under fairly general conditions:Weak Equilibrium (Relative) Bias: an increase in the relative supply ofa factor always induces technological change that is biased in favor ofthis factor.Strong Equilibrium (Relative) Bias: if the elasticity of substitutionbetween factors is suffi ciently large, an increase in the relative supply ofa factor induces suffi ciently strong technological change biased towardsitself that the endogenous-technology relative demand curve of theeconomy becomes upward-sloping.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.9 / 89

Biased Technological ChangeImportanceEquilibrium Relative Bias in More Detail ISuppose the (inverse) relative demand curve:wH /wL D (H/L, A)where wH /wL is the relative price of the factors and A is a technologyterm.A is H-biased if D is increasing in A, so that a higher A increases therelative demand for the H factor.D is always decreasing in H/L.Equilibrium bias: behavior of A as H/L changes,A (H/L)Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.10 / 89

Biased Technological ChangeImportanceEquilibrium Relative Bias in More Detail IIWeak equilibrium bias:A (H/L) is increasing (nondecreasing) in H/L.Strong equilibrium bias:A (H/L) is suffi ciently responsive to an increase in H/L that the totaleffect of the change in relative supply H/L is to increase wH /wL .i.e., let the endogenous-technology relative demand curve bewH /wL D (H/L, A (H/L)) D̃ (H/L) Strong equilibrium bias: D̃ increasing in H/L.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.11 / 89

Biased Technological ChangeBasics and DefinitionsFactor-augmenting technological changeProduction side of the economy:Y (t ) F (L (t ) , H (t ) , A (t )) ,where F / A 0.Technological change is L-augmenting ifL F (L, H, A) F (L, H, A). AA LEquivalent to:the production function taking the special form, F (AL, H ).Harrod-neutral technological change when L corresponds to labor andH to capital.H-augmenting defined similarly, and corresponds to F (L, AH ).Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.12 / 89

Biased Technological ChangeBasics and DefinitionsFactor-biased technological changeTechnological change change is L-biased, if: F (L,H ,A )/ L F (L,H ,A )/ H A 0.Skill premiumRelative supplyof skillsω’ωRelative demandfor skillsSkill-biased tech. changeH/LFigure: The effect of H-biased technological change on relative demand andrelative factor prices.Courtesy of Princeton University Press. Used with permission.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.13 / 89

Biased Technological ChangeBasics and DefinitionsConstant Elasticity of Substitution Production Function ICES production function case: σσ 1 σ 1σ 1σσY (t ) γL (AL (t ) L (t )), γH (AH (t ) H (t ))whereAL (t ) and AH (t ) are two separate technology terms.γi s determine the importance of the two factors, γL γH 1.σ (0, ) elasticity of substitution between the two factors.σσσσσ , perfect substitutes, linear production function is linear. 1, Cobb-Douglas, 0, no substitution, Leontieff. 1, “gross substitutes,” 1, “gross complements”.Clearly, AL (t ) is L-augmenting, while AH (t ) is H-augmenting.Whether technological change that is L-augmenting (orH-augmenting) is L-biased or H-biased depends on σ.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.14 / 89

Biased Technological ChangeBasics and DefinitionsConstant Elasticity of Substitution Production Function IIRelative marginal product of the two factors:MPH γMPLAH ( t )AL ( t )σ 1σH (t )L (t ) σ1,(1)where γ γH /γL .substitution effect: the relative marginal product of H is decreasing inits relative abundance, H (t ) /L (t ).The effect of AH (t ) on the relative marginal product:If σ 1, an increase in AH (t ) (relative to AL (t )) increases therelative marginal product of H.If σ 1, an increase in AH (t ) reduces the relative marginal product ofH.If σ 1, Cobb-Douglas case, and neither a change in AH (t ) nor inAL (t ) is biased towards any of the factors.Note also that σ is the elasticity of substitution between the twofactors.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.15 / 89

Biased Technological ChangeBasics and DefinitionsConstant Elasticity of Substitution Production Function IIIIntuition for why, when σ 1, H-augmenting technical change isL-biased:with gross complementarity (σ 1), an increase in the productivity ofH increases the demand for labor, L, by more than the demand for H,creating “excess demand” for labor.the marginal product of labor increases by more than the marginalproduct of H.Take case where σ 0 (Leontieff): starting from a situation in whichγL AL (t ) L (t ) γH AH (t ) H (t ), a small increase in AH (t ) will createan excess of the services of the H factor, and its price will fall to 0.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.16 / 89

Biased Technological ChangeBasics and DefinitionsEquilibrium BiasWeak equilibrium bias of technology: an increase in H/L, inducestechnological change biased towards H. i.e., given (1):d (AH (t ) /AL (t ))dH/Lσ 1σ 0,so AH (t ) /AL (t ) is biased towards the factor that has become moreabundant.Strong equilibrium bias: an increase in H/L induces a suffi cientlylarge change in the bias so that the relative marginal product of Hrelative to that of L increases following the change in factor supplies:dMPH /MPL 0,dH/LThe major difference is whether the relative marginal product of thetwo factors are evaluated at the initial relative supplies (weak bias) orat the new relative supplies (strong bias).Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.17 / 89

Baseline Model of Directed Technical ChangeEnvironmentBaseline Model of Directed Technical Change IFramework: expanding varieties model with lab equipmentspecification of the innovation possibilities frontier (so none of theresults here depend on technological externalities).Constant supply of L and H.Representative household with the standard CRRA preferences: 0exp ( ρt )Aggregate production function:h Y ( t ) γ L YL ( t )C (t )1 θ 1dt,1 θε 1ε γ H YH ( t )ε 1ε(2)i ε ε 1,(3)where intermediate good YL (t ) is L-intensive, YH (t ) is H-intensive.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.18 / 89

Baseline Model of Directed Technical ChangeEnvironmentBaseline Model of Directed Technical Change IIResource constraint (define Z (t ) ZL (t ) ZH (t )):C (t ) X (t ) Z (t ) Y (t ) ,(4)Intermediate goods produced competitively with:1YL (t ) 1 βand1YH (t ) 1 βZ N L (t )0Z N H (t )0xL (ν, t )1 β d ν Lβ(5)xH (ν, t )1 β d ν H β ,(6)where machines xL (ν, t ) and xH (ν, t ) are assumed to depreciate afteruse.Daron Acemoglu (MIT)Economic Growth Lectures 12 and 13December 8 and 13, 2016.19 / 89