The two-sector growth model developed by
Paul Romer shows that the rate of laboraugmenting
technological change depends on
the proportion of the labor force devoted to
research and development and on the
productivity of researchers.
a. Suppose that government subsidies for green
energy lead to a larger fraction of the labor
force devoted to research and development.
Use the two-sector growth model to explain
the effect on the growth rates of laboraugmenting
technological change and the
standard
of living.
b. Now suppose that government subsidies for
green energy do not increase the fraction of
the labor force devoted to research and development.
Instead, the subsidies simply cause
existing researchers to move from other areas
into green energy. What would have to be
true about the productivity of researchers in
green energy for the subsidy to still increase
the growth rates of labor-augmenting technology
and the standard of living?