Technology adoption, human capital formation and income differences

The paper presents a model of technology adoption with endogenous supply of human capital. I investigate the effects of skill bias technical change in the frontier economies on the evolution of output, the quantity and quality of human capital in the adopting countries. The framework introduces a novel feature by connecting the direction of technology adoption to a sequential process of skill accumulation, where the returns of advanced human capital depend on the quality of basic education. I find that moderate skill bias at the frontier produces convergence in output per capita, while strong skill bias generates two convergence clubs among adopting countries. In the latter case, a further increase in skill bias leads to a larger disparity in output between clubs. Furthermore, the countries in the low income club converge to a new steady-state characterized by a higher quantity and lower quality of skilled labor.