New Demand Economics: Education, Demand Upgrading, and Structural Change

Fenghua Wen, Xieyu Yin and Chufu Wen

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Abstract: Education can change what households buy as well as what workers produce. We study this demand channel in a two-sector growth model. Education shifts spending toward an education-sensitive bundle, drawing labor into the sector that supplies it. Learning lowers its relative price. When substitution between the bundles is strong enough, the price decline raises its expenditure share and reinforces the initial shift. The balance between this feedback and technological catch-up determines the long-run allocation. Weak feedback gives a unique stable configuration. Strong feedback can sustain two stable configurations with different expenditure shares, so the long-run outcome depends on initial productivity. A sufficiently large, attainable increase in education removes the low-share configuration. This transition can occur through demand alone, without a direct productivity effect of education. Early consumption commitments can also change the economy's destination, even though their budget share eventually vanishes. The growth and welfare consequences depend on learning gained in the expanding sector and learning forgone in the other. We derive the net learning benefit that a planner would attach to reallocation.

Date: 2025-10, Revised 2026-09
New Economics Papers: this item is included in nep-hme and nep-upt
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