DP11063 Balanced Growth Despite Uzawa

Author(s): Gene Grossman, Elhanan Helpman, Ezra Oberfield, Thomas Sampson
Publication Date: January 2016
Keyword(s): balanced growth, capital-skill complementarity, neoclassical growth, technological progress
JEL(s): E1, J2, O1, O4
Programme Areas: International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11063

Evidence for the United States suggests balanced growth despite falling investment-good prices and less than unitary elasticity of substitution between capital and labor. This is inconsistent with the Uzawa Growth Theorem. We extend Uzawa's theorem to show that introducing human capital accumulation in the standard way does not resolve the puzzle. However, balanced growth is possible if education is endogenous and capital is more complementary with schooling than with raw labor. We describe balanced growth paths for several neoclassical growth models with capital-augmenting technological progress and endogenous schooling. The balanced growth path in an overlapping-generations model in which individuals choose their time in school matches key features of the U.S. record.