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Endogenous human capital formation, distance to frontier and growth

Basu, Sujata and Mehra, Meeta K (2011): Endogenous human capital formation, distance to frontier and growth.

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Abstract

We examine human capital's contribution to economy-wide technological progress through two channels -- imitation and innovation -- innovation being more skilled-intensive than innovation. We develop a growth model considering an endogenous ability-driven skill acquisition decision of an individual. We show that skilled labor is growth enhancing in the ``imitation-innovation" regime and the ``innovation-only" regime whereas unskilled labor is growth enhancing in the ``imitation-only" regime. Steady state exists and, in the long run, an economy may or may not converge to the world technology frontier, depending on its initial position and the growth rate of the frontier economy. In the diversified regime, technological progress raises the return to ability and generates an increase in wage inequality between and within groups -- consistent with the pattern observed across countries.

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