Klaus Prettner

The past and future of knowledge-based growth

Conventional R&D-based growth theory argues that productivity growth is driven by population growth but the data suggest that the erstwhile positive correlation between population and productivity turned negative during the 20th century. In order to resolve this problem we integrate R&D-based innovations into a unified growth framework with micro-founded fertility and schooling behavior. The model explains the historical emergence of R&D-based growth and the subsequent emergence of mass education and the demographic transition. The ongoing child quality-quantity trade-off during the transition explains why in modern economies high growth of productivity and income is associated with low or negative population growth. Because growth in modern economies is based on the education of the workforce, the medium-run prospects for future economic growth - when fertility is going to be below replacement level in virtually all developed countries - are much better than suggested by conventional R&D-based growth theories.

Demographic change in models of endogenous economic growth. A survey

While in exogenous growth models demographic variables are linked to economic prosperity mainly via the population size, the structure of the workforce, and the capital intensity of workers, endogenous growth models and their successors also allow for interrelationships between demographic variables and technological change. However, most of the existing literature considers only the interrelationships based on population size and its growth rate and does not explicitly account for population aging. The aim of this paper is (a) to review the role of population size and population growth in the most commonly used endogenous economic growth models, (b) discuss models that also allow for population aging, and (c) sketch out the policy implications of the most commonly used endogenous growth models and compare them to each other.

Demographic Change and R&D-based Economic Growth: Reconciling Theory and Evidence

In recent decades, most industrialized countries experienced declining population growth rates caused by declining fertility and associated with rising life expectancy. We analyze the effect of continuing demographic change on medium- and long-run economic growth by setting forth an R&D-based growth model including an analytically tractable demographic structure. Our results show that, in response to demographic change, technological progress and economic growth accelerate in the medium run but slow down in the long run. Numerical investigation reveals that the time period during which technological progress and economic growth are faster than without demographic change can be very long. Since the theoretical predictions for the medium run are consistent with the negative association between population growth and economic growth found in the empirical literature, the present framework can reconcile R&D-based growth theory with the available empirical evidence.

R&D-based growth in the post-modern era

Conventional R\&D-based growth theory suggests that productivity growth is positively correlated with population size or population growth, an implication which is hard to see in the data. Here we integrate microfounded fertility and schooling into an otherwise standard R\&D-based growth model. We then show how a Beckerian child quality-quantity trade-off explains why higher growth of productivity and income per capita are associated with lower population growth. The medium-run prospects for future economic growth - when fertility is going to be below replacement level in virtually all fully developed countries - are thus much better than predicted by conventional R\&D-based growth theory.

Growth and welfare effects of health care in knowledge-based economies

We study the effects of labor intensive health care within a research and development (R&D) driven growth model with overlapping generations. Health care increases longevity, labor participation, and productivity, while it also diverts labor away from production and R&D. We examine under which conditions expanding health care enhances growth and welfare and establish mild conditions under which the provision of health care beyond the growth-maximizing level is Pareto superior.

Trade and Productivity: The Family Connection Redux

We investigate the effects of demographic change and human capital accumulation on trade and productivity of domestic firms. In so doing we integrate a micro-founded education and fertility decision of households into a model of international trade with firm heterogeneity. Our framework leads to four testable implications: i) the export share of a country increases in the education level of its population, ii) the export share of a country decreases in the birth rate of its population, iii) the average profitability of firms increases in the education level of a country, iv) the average profitability of firms decreases in the birth rate of a country. We find that all four implications are supported by empirical evidence for a panel of OECD countries from 1960 to 2010. Our results suggest that investments in human capital accumulation, especially in higher education, are an important determinant of a countrys international competitiveness. Furthermore, falling birth rates need not be a serious concern with respect to productivity and international competitiveness of countries.

It's a Sin - Contraceptive Use, Religious Beliefs, and Long-Run Economic Development

This study presents a novel theory on the interaction of social norms, fertility, education, and their joint impact on long-run economic development. The theory takes into account that sexual intercourse is utility enhancing and that the use of modern contraceptives potentially conflicts with prevailing social norms (religious beliefs). The theory motivates the existence of two steady states. At the traditional steady state, the economy stagnates, fertility is high, education is minimal, and the population sustains a norm according to which modern contraceptives are not used. At the modern steady state, the population has abandoned traditional beliefs, modern contraceptives are used, fertility is low and education and economic growth are high. Social dynamics explain why both equilibria are separated by a saddlepoint-equilibrium (a separatrix), i.e. why it is so hard to transit from the traditional regime to the modern regime. Enhancing the value of education is identified as a promising policy to encourage contraceptive use and to initiate the take-off to long-run growth.

Technology, Trade, and Growth: The Role of Education

We generalize a trade model with firm-specific heterogeneity and R&D-based growth to allow for an endogenous education decision of households and an endogenously evolving population. Our framework is able to explain cross-country differences in living standards and trade intensities by the differential pace of human capital accumulation among industrialized countries. Consistent with the empirical evidence, scale matters for relative economic prosperity as long as countries are closed, whereas scale does not matter in a fully globalized world. Interestingly, however, the average human capital level of a country influences its relative economic prosperity irrespective of its trade-openness. While being consistent with the empirical evidence, our framework has the additional advantage that steady-state growth of income does not hinge on the unrealistic assumption of an ever expanding population.

Automation and Demographic Change

We analyze the effects of declining population growth on the adoption of automation technology. A standard theoretical framework of the accumulation of traditional physical capital and of automation capital predicts that countries with a lower population growth rate are the ones that innovate and/or adopt new automation technologies faster. We test the theoretical prediction by means of panel data for 60 countries over the time span from 1993 to 2013. Regression estimates provide empirical support for the theoretical prediction and suggest that a 1% increase in population growth is associated with approximately a 2% reduction in the growth rate of robot density. Our results are robust to the inclusion of standard control variables, the use of different estimation methods, the consideration of a dynamic framework with the lagged dependent variable as regressor, and changing the measurement of the stock of robots.

The lost race against the machine: Automation, education and inequality in an R&D-based growth model

We analyze the effect of automation on economic growth and inequality in an R&D-based growth model with two types of labor: highskilled labor that is complementary to machines and low-skilled labor that is a substitute for machines. The model predicts that innovationdriven growth leads to increasing automation, an increasing skill premium, an increasing population share of graduates, increasing income and wealth inequality, a declining labor share, and (in an extension of the basic model) increasing unemployment. In contrast to Pikettys famous claim that faster economic growth reduces inequality, our theory predicts that faster economic growth promotes inequality.