Education and Training in a Model of Endogenous Growth with Creative Destruction

By formulating an endogenous growth model that combines elements from Romer (1990), Aghion and Howitt (1992), and van Zon and Yetkiner (2003), the present paper studies the contribution of education and training on economic growth through their impact on the rate of innovation. The article addresses two main issues. The first is the optimum provision of on-the-job training necessary to be able to adopt, and adapt to new technologies. The second is the impact of both formal education and on-the-job training on the innovative capacity of an economic system that is the ultimate cause of output growth. In our set-up, education enhances R&D activities and lowers adjustment costs to new technologies, thus facilitating their adoption, while on the other hand on-the-job training ensures the possibility to implement the new coming technologies and reap all the related future profits. We assume that the adoption of a new technology consists of two periods, i.e. the training phase during which newly hired workers acquire the right amount of know how in order to become familiar with the specific new technology, and the implementation or production phase in which profit flows arise for firms and in which the cost savings that can be realized arise from productivity increases in the previous phase. By extending the training phase, entrepreneurs run a greater risk of shortening the production phase for a given arrival rate of new technologies that progressively erode the profit flows obtained from existing technologies. The paper shows first that it is possible to find a profit-maximizing, endogenously determined, amount of training that depends on the workers’ educational attainment. Thus, a situation in which better educated workers may be disproportionately selected for training issues is possible, especially in times of rapid technological change. However, the paper also shows that a non-linear relationship between education and technological change (and growth) exists, so that an increase in the formal level of education can even result in a reduction in the rate of growth. The reason for this is the increase in creative destruction that raises ‘technology adoption costs’ in terms of output foregone during re-training spells that arrive at a faster rate. The results offer some insights that are interesting from an education policy perspective.