Technology and the economy : the two-way causality

Abstract

The thesis explores the role of technology in some of the most important economic phenomena of the last decades and examines how changes in the state of the economy could influence the nature of technology. In the first chapter I study the relation between supply of skilled labor, firms’ choice of optimal technology and wage inequality. Researchers have acknowledged that one of the key causes of the increase in inequality across OECD countries was the introduction of skill-biased production methods, which generated a higher demand for skilled workers. In the chapter, I explore whether the shift to skill-biased production method was a consequence of changing nature of new global technological paradigm (specifically, the arrival of the information technology) or a consequence of firms’ choice to exploit the new technological paradigm in a way that favors skilled workers. Such choice could be motivated by a rapid increase in availability of college graduates in 70s and 80s. To study these questions, I first observe that while the source of the latter cause is global, the source of the former rests in labor market conditions at the country level. Hence panel data estimators could be used to disentangle the two effects. I find that endogenous technology choice at the local level can explain 30% of the increase of the college premium in the OECD countries. The second chapter studies how the rate and direction of technological change is influenced by the parameters of consumers’ preferences. I demonstrate that the elasticity of substitution between goods in the Dixit-Stiglitz framework can be represented as a simple linear function of a taste heterogeneity measure. I combine this result with Young’s model of endogenous growth, which predicts that the speed of technological progress depends positively on the elasticity of substitution between goods. The purpose of the third chapter is to summarize the convergence of Central and Eastern European to Western European economies in the period between 1995 and 2007. It decomposes growth of relative output into growth of capital, labor input, human capital and TFP. I find the evidence for the massive contribution of TFP convergence in the GDP convergence.