Growth versus equity: A CGE analysis for effects of factor-biased technical progress on economic growth and employment

•We examine the economy-wide impacts of factor-biased technical changes, focusing on the Korean economy.•Simulation results from a CGE model are analyzed in terms of economic growth, employment, and distribution.•Results show that technological innovation drives economic growth with productivity improvements.•However, it is found that factor-biased technical change increases demand for capital and high-skilled labor.•A shift in the value-added composition is found to increase income inequality in the economy.

With factor-biased technical progress described as labor-saving and skill-biased technical changes, there are concerns that technological innovation can lead to unemployment and widen inequality in the economy. This study explores impacts of factor-biased technical changes on the economic system in terms of economic growth, employment, and distribution, using a computable general equilibrium (CGE) model. The results show that technological innovation contributes to higher level of economic growth with productivity improvements. However, our analysis suggests that economic growth accompanied by skill- and capital-biased technical progress disproportionately increases demand for capital and high-skilled labor over skilled and unskilled labor. This shift in the value-added composition is found to deepen income inequality, as more people in higher income groups benefit from skill premium and capital earnings. Our results suggest that policymakers should prepare a wide range of policy measures, such as reforms in educational programs and taxation systems, in order to ensure sustainable growth.