1. Market Size or Acceleration Effects; Hypotheses to Explain Skill Biased Technical Change* Mark Sanders Max Planck Institute for Economics Entrepreneurship, Economic Growth and Public Policy Kahlaïsche Strasse 10 D-07745, Jena, Germany sanders@mpiew-jena.mpg.de Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-27, 2005 1 of 17

2. Outline Motivation The Model Competing Hypotheses Agenda for Further Research Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 2 of 17

3. Motivation Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 3 of 17

4. Motivation 1)The labour market perspective of low skilled workers deteriorated 2)Trade, Technology or something completely different? 3)SBTC, ok but how? Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 4 of 17

5. Motivation Direction… Hicks (1942) + Romer (1990) = (Strong) Market Size Hypothesis Acemoglu (1996,1998,2002),Kiley (1999) …or Speed Nelson&Phelps (1966) + Greenwood&Uysal (2004) = Acceleration Hypothesis Aghion (2001), Galor&Tsiddon (1997) Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 5 of 17

6. Aim(s) of the Paper 1)Develop a general model that can illustrate/evaluate both hypotheses 2)Identify parameter and specification restrictions 3)Evaluate the available empirical evidence 4)Formulate future empirical research agenda Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 6 of 17

7. The Model s.t. Consumers: s.t. Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 7 of 17

8. The Model s.t. Producers: Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 8 of 17

9. The Model Short-Run Equilibrium: w H /w L n H /n L Relative Supply Shift PMA-curve L H /L L Z2Z2 Z1Z1 Z1Z1 Z2Z2 Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 9 of 17

10. The Model The Value of Innovation: For the Life Cycle Model: Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 10 of 17

11. The Model The “Production” of Innovation: For the Life Cycle Model λ=1 Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 11 of 17

12. The Model Innovators/Entrepreneurs: Short-Run Equilibrium: Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 12 of 17

13. The Model Steady State Equilibrium: Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 13 of 17

14. The Model Steady State Equilibrium: w H /w L n H /n L PMA RDA I RDA II RDA III n H /n L w H /w L PMA Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 14 of 17

15. Competing Hypotheses The Strong Market Size Effect: 1)More likely when intra-sectoral (intertemporal) spillovers are high. -Evidence is scarce and ambiguous 2)More likely when returns to scale are constant in R&D. -Evidence suggests they are diminishing 3)Requires high and low skilled to be gross substitutes. -Evidence suggests they are Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 15 of 17

16. Competing Hypotheses The Acceleration Hypothesis: 1)Requires PLC to be present -Evidence is abundant and unambiguous 2)Insensitive to parameter values and specification of innovation functions. -Evidence is scarce and ambiguous 3)Requires shock in parameters or specification of innovation functions at the arrival of a GPT. -Evidence is scarce and anecdotal Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 16 of 17

17. Agenda for Research 1)Establish PLC Empirically. -distinguishing workers by education and job types 2)Estimate Innovation Functions -distinguishing radical and incremental innovation or product and process innovation 3)Estimate Duration of Bias. -how fast or slow do we move over PLC and to what extent is bias permanent Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 17 of 17

18. Thank You Questions and/or Comments? Mark Sanders, Max Planck Institute for Economics Annual Conference of the European Economic Association, Amsterdam August 24-28, 2005 18 of 17