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Tradable and nontradable directed technical change

Óscar Afonso () and Tiago Sequeira ()
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Óscar Afonso: Universidade do Porto, Faculdade de Economia, OBEGEF, and CEFAGE-UBI.

CEFAGE-UE Working Papers from University of Evora, CEFAGE-UE (Portugal)

Abstract: We wish to reconcile the major trends in wages and the terms of trade using a directed technical change approach in which: (i) tradable and nontradable goods can be substitutes or complements; and (ii) scale eects can be present or can be partially or totally removed. With a lower skilled labor ratio and a higher relative wage in the tradable sector, the price (real exchange rate or terms of trade) mechanism is crucial in determining sectoral productivity dierences and thus wage inequality. Along the balanced growth path (BGP), the real exchange rate can be negatively related with the relative advantage to entry through horizontal innovation and with the relative labor level, depending on scale eects. The wage premium increases due to an increase in the relative labor level in the nontradable sector under substitutability with scale eects or under complementarity without scale eects. A calibrated version of the model indicates that the model replicates closely the data on wages for Germany. Moreover, as substitutability increases, the nontradable technological-knowledge bias, which drives wages, rises, while the nontradable relative price and nontradable value of knowledge decrease.

Keywords: Directed technological change; substitutability; scale effects; relative prices; wage premium; economic growth. (search for similar items in EconPapers)
JEL-codes: O30 O41 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ino
Date: 2017
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