Skills gap: The timing of technical change

• This article generalizes the business cycle model in Jovanovic (2006).
• I generalize the utility function and the distribution of the productivity shocks.
• These assumptions are consistent with the skill-biased technical change.
• Optimal technical change is time-varying.
• In Jovanovic (2006) optimal technical change is constant.

This article generalizes the business cycle model in Jovanovic (2006) along two important and meaningful dimensions: (i) more general utility function; (ii) more realistic distribution properties of the productivity shocks. Unlike the original model, I assume the power utility function of the representative agent, and a non-zero expected value of the distribution of the shocks. I include the non-zero expected value of the productivity shocks to account for the skill-biased nature of the technical change in the post-war period. The model implies an endogenous time-varying technical change as an optimal investment policy, consistent with the data.