Wednesday, March 9, 2011

Jones and Romer's Stylized Facts

Actually this very readable article is titled: "The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital". Kaldor proposed six "stylized facts" about the economic growth process. Jones and Romer propose six new ones. They are (in bold with my comments in plain text after them):

1) Increases in the extent of the market. Increased flows of goods, ideas, finance, and people—via globalization, as well as urbanization—have increased the extent of the market for all workers and consumers.

On this, the authors sum up: "When nonrival goods (i.e. ideas/technology) are present, the gains from trade are not exhausted until everyone is connected to everyone else". The traditional model of trade based on comparative advantage says that the gains from economic integration are due to differences in productivity that can be exploited through specialization. According to Jones and Romer, new trade theory is really about increasing market size to exploit ideas on a larger scale.

2) Accelerating growth. For thousands of years, growth in both population and per capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the last century.

This is true but it doesn't rule out the level of technology following a logistic curve with us now somewhere on the steep portion near the middle of the curve. In other words, there could still be limits to technological change and growth.

3) Variation in modern growth rates. The variation in the rate of growth of per capita GDP increases with the distance from the technology frontier.

This isn't what a simple version of the Solow model predicts. It is probably due mostly to differences in the diffusion of advanced technology across the poorer countries. Some are open to improving their productivity and some are not.

4) Large income and total factor productivity (TFP) differences. Differences in measured inputs explain less than half of the enormous cross-country differences in per capita GDP.

This fact is the main one that has to be added to the Solow model of growth in order to make some first order sense of the patterns of development and growth across countries around the world.

5) Increases in human capital per worker. Human capital per worker is rising dramatically throughout the world.

This is subsumed into exogenous technological change in the "neoclassical growth model".

6) Long-run stability of relative wages. The rising quantity of human capital, relative to unskilled labor, has not been matched by a sustained decline in its relative price.

In other words, the wages of skilled workers have not declined relative to those of unskilled workers despite the increasing availability of skilled workers. This can be explained if technological change is "skill-biased", which has increased the demand for skilled workers even as their supply has increased too.

For something somewhat similar regarding energy and economic growth see the conclusions of my survey of the topic.

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