29 March 2016
Ivan Lyubimov (Gaidar Institute for Economic Policy, Moscow)
Weak institutions and the race between education and technology
We study a developing economy in which the representative firm's production function exhibits complementarities between high-skilled and low-skilled employees and the available level of technology. We model this economy in the context of Goldin and Katz's race between technology and education. To introduce the race between education and technology into the model, we let the representative firm invest in the acquisition of new technology. Importantly though, the race might be slowed down if the protection of property rights in the economy is weak (or, alternatively, when mismanagement practices are common). In this case, firms have limited incentives (capabilities) to invest in the acquisition of new technologies. As we let both types of employees decide how much human capital to acquire, slow technological progress might constrain the demand for human capital. If property rights are weakly protected (if the level of mismanagement is high), better educational opportunities will result in the choice of a higher level of education only if individuals can transfer their human capital to a different economy, thus contributing to the race between education and technology in another country. We thus conclude that only if an improvement in the school system is combined with better property rights enforcement (better management practices) will the race between education and technology accelerate. Under the latter circumstances, if the level of technology is sophisticated enough, a relatively large number of high-skilled employees is required to let human capital keep pace with the level of technology to reach the economy's production potential and to avoid high inequality. We use examples from the economy of Russia to illustrate these findings.
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