Directed Technical Change, Skills Gap and Predictability

Directed technical change is to a large extent driven by changes in the supply of workforce skills. I demonstrate that directed technical change does not respond to changes in the skill saturation of the workforce in a way that fully reflects supply of the actual existing skill level. I estimate the gap coming from this overestimation and show that it has a predictive power for future consumption and production levels. I construct a representative firm business cycle model, in which it is optimal to maintain the gap, which in turn generates specific patterns of short- and long-run consumption and production growth. Intuitively, a high skills gap acts as an economic shock that increases consumption and production in the long term due to a higher future productivity level