Education and innovation as twin-engines of growth

Abstract

We develop a dynamic general equilibrium model of education, quality and variety innovation, and scale-invariant growth. The early endogenous innovation-based growth models incorporate a scale effect predicting that larger economies are characterized by higher per capita growth rates. Recent models of semi-endogenous growth remove this scale effect but instead imply that economic growth depends proportionally on population growth. In contrast to the predecessor models, this paper argues that endogenous human-capital accumulation rather than an exogenously given continuing increase of the population is decisive for per capita growth. The consequence of the proposed integration of human capital accumulation into a two-R&D-sector model of quality and variety innovation is that education and innovation appear as twin-engines of growth and that steady state growth rates can be enhanced by subsidizing education.