The Adverse Welfare Effect of an Unskilled-Biased Technological Advancement

We present a model with two production sectors, one more advanced than the other. Counter-intuitively, we find that a technological improvement may lower the long-run well-being in the economy, even though markets are fully competitive. This can occur if the technological improvement happens in the less advanced sector. In that case, the technological improvement indeed raises production and individuals’ utility in the short-run, but lowers them in the long-run as it lowers the incentive to direct investments towards the advanced sector. We find empirical support to this result via a regression analysis over a cross section of countries