The Role of Innovation in Structural Change, Economic Development, and the Labor Market

Abstract

This chapter reviews the theory and broad empirical evidence of how skill-biased technical change, structural change, and development interact with each other, with the ultimate aim to derive conclusions about inequality related to how different skills are rewarded in the labor market. It is argued that the adoption and adaptation of foreign knowledge leads to structural change along the development path. The analysis also shows that sectors differ very much in terms of their skill intensity, which will likely lead to a changing role of skill-biased technical change over the development path. In particular, technical change biased in favor of high- and medium-skilled labor plays an important role in the early stages of development (roughly until middle-income level). After middle-income levels, biased technical change is overshadowed by an increasing supply of medium- and high-skilled labor. This implies that until about middle-income level, inequality between skill levels increases and after middle-income level, the skill premiums decline, thus leading to more equality in the labor market. This suggests that education plays a role both as a development policy and as a form of social protection policy (the latter mainly during later stages of the development process).