Endogenous Skill-Biased Invention and its Diffusion to Adoptive Knowledge Through Innovation

A growth model is presented that examines i) the creation of skill-biased knowledge through invention (defined here as additions to leading-edge knowledge) and ii) its diffusion to adoptive knowledge through innovation (defined here as later applications of knowledge to low cost production methods). The model incorporates my theory that invention, innovation, and adoption (as defined here) are sectors that range from the most to least skill-intensive. The model assumes additions to leading-edge knowledge are created with high-skilled researchers in the inventive sector and financed by students acquiring human capital. The remaining high-skilled workers, working with the most recent stock of total knowledge and low-skilled workers in the innovative sector, find low cost methods of production while creating a adoptive knowledge spillover that increases with the size of this sector and that can be used with a lag as an input into the adoptive sector, which requires only low-skilled workers. This paper's model can explain the inverse movements of relative wages and the detrended relative supply of U.S. skilled workers during recent decades. Endogenizing diffusion provides i) an additional channel through which inequality and growth can be affected, and ii) a better fit of the U.S. economic growth data during the inverse movements of the relative supply and relative wage