DP2584 The World Technology Frontier
We define a country's technology as a triple of efficiencies: one for unskilled labour, one for skilled labour, and one for capital. We find a negative cross-country correlation between the efficiency of unskilled labour and the efficiencies of skilled labour and capital. We interpret this finding as evidence of the existence of a World Technology Frontier. On this frontier, increases in the efficiency of unskilled labour are obtained at the cost of declines in the efficiency of skilled labour and capital. We estimate a model in which firms in each country optimally choose from a menu of technologies, i.e. they choose their technology subject to a Technology Frontier. The optimal choice of technology depends on the country's endowment of skilled and unskilled labour, so that the model is one of appropriate technology. The estimation allows for country-specific technology frontiers, due to barriers to technology adoption. We find that poor countries tend disproportionately to be inside the World Technology Frontier.
