Skill-Biased Technical Change: On Endogenous Growth, Wage Inequality and Government Intervention

This paper builds a general equilibrium model of endogenous growth outside the representativeagent framework to show that when individuals are heterogenous, persistent inequality will bethe result of economic growth. Individuals are assumed to be born with different abilities, whichwill lead to a steady state growth path of biased technical change towards individuals with ahigher ability. The problem of inequality as a result of skill-biased technical change is partiallysolved by allowing for government intervention. Intervention is shown to solve the problem tosuch a degree that particular subsidies and taxes on labor income are efficient.