Technology in Society 62 (2020) 101295

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Technology in Society
journal homepage: http://www.elsevier.com/locate/techsoc

Revitalizing the race between technology and education: Investigating the

growth strategy for the knowledge-based economy based on a CGE analysis
Yeongjun Yeo a, *, Jeong-Dong Lee b
a
National Assembly Futures Institute (NAFI), 1, Uisadang-daero, Yeongdeungpo-gu, Seoul, 07233, Republic of Korea
b
Technology Management, Economics, and Policy Program (TEMEP), College of Engineering, Seoul National University, Gwanak-gu, Seoul, 151-742, Republic of Korea

A R T I C L E I N F O A B S T R A C T

Keywords: This study conducted quantitative policy experiments using a computable general equilibrium model to inves­
Innovation tigate how long-run economic growth can be achieved through the endogenous interactions between innovation
Technology and human capital accumulation. The analysis found that there are limits to driving productivity growth and
Human capital
enhancing growth potential when focusing solely on the expansion of technological innovation. However, our
Education
Growth
results suggest that promotion of the complementarity between technological innovation and human capital
Computable general equilibrium formation may alleviate the inequalities of wages and employment induced by skill-biased technological change,
promoting balanced growth among industrial sectors with higher productivity improvement and scale effects.
This study suggests that in order to spur long-run growth in knowledge-based economy, policymakers should
establish educational infrastructure to support workers to move up the skill ladder and cope with rapid tech­
nological change.

1. Introduction categories with different skill levels [8–10]. Considering heterogeneous

A large amount of literature shares the perception that growth po­
tential of economies should be expanded through increasing produc­
tivity improvements, as it is difficult to increase potential growth rates
through adding additional factors of production or reallocating those
across industrial sectors [1]. Following the contribution of endogenous
growth models, a growing body of studies puts emphasis on the
importance of technological innovation and human capital to spur
productivity growth. These studies emphasize that the efficient combi­
nation among factors of production is more important than the levels of
factors of production to account for cross-country differences in income
[2–5]. From this point of view, human capital is viewed as the corner­
stone of technological progress, as it determines the types of innovation
and economies’ capacity to assimilate existing knowledge [6].
Traditionally, a variety of literature on economic growth explores
the level effects of human capital accumulation to explain the technol­
ogy gap between countries, which leads to sharp increase of enrollment
in tertiary education in many countries [7]. However, in the presence of
an increasing supply of workers with higher skills, the labor market
outcomes and economic growth of economies are determined, condi­
tional on the evolution of labor demand. The key underlying de­
terminants behind the endogenous interaction of supply and demand for
labor is largely associated with the substitutability between labor
* Corresponding author. Tel.: þ82-2-2224-9811; fax:þ82-2-786-3977.
E-mail addresses: yjyeo@nafi.re.kr (Y. Yeo), leejd@snu.ac.kr (J.-D. Lee).
human capital with different properties and marginal products, recent
studies argue that skill-biased technological change (SBTC) is a driving
force behind the shifts in labor demand and rising income dispersions
within the economy. In this regard, SBTC has been often described as “a
race between education and technology” [11]. The evolution of the
labor skill composition induced by the race between education and
technology brings about macroeconomic effects such as wage structure,
employment, industrial structures, productivity growth, and income
distribution.
Accordingly, we can understand that the dynamic interaction be­
tween innovation and human capital shapes the growth patterns of the
national economy. With this background in mind, this study aims to
construct a computable general equilibrium (CGE) model with de­
scriptions of the endogenous interaction between innovation and human
capital accumulation. Previous studies based on this perspective have
attempted to propose theoretical models to account for the contribution
of the complementarity between skill upgrading via human capital in­
vestment and technological progress embodied in capital goods to long-
run economic growth [12]. However, it is difficult to find empirical
studies that reflect this perspective using macroeconomic models based
on identifiable macroeconomic data. Moreover, the associated macro­
economic analysis considering demand-supply sides and institutional
conditions has not actively conducted. This also implies that there are

https://doi.org/10.1016/j.techsoc.2020.101295
Received 17 October 2019; Received in revised form 29 May 2020; Accepted 17 June 2020
Available online 20 July 2020
0160-791X/© 2020 Elsevier Ltd. All rights reserved.
Y. Yeo and J.-D. Lee
not many country-specific studies carried out.
Thus, this study aims to conduct policy experiments based on a CGE
model focusing on the Korean economy to investigate how long-run
economic growth can be achieved through the dynamic interaction be­
tween innovation and human capital accumulation. We choose to study
Korean economy since Korea currently faces challenges to increase its
growth potential in light of the long-term decline in its potential eco­
nomic growth rate. In this regard, this study expects to provide quan­
titative evidence for the macroeconomic impacts of educational and
innovation policy designed to enhance its long-run growth potential.
Furthermore, this study aims to investigate and understand the direct
and indirect impact channels within the national economy driven by
endogenous complementarity between innovation and human capital
accumulation. Based on the findings drawn from the analysis, we expect
to provide extensive insights on the role and scope of innovation policy
for promoting long-run growth of the national economy.
The rest of the paper is structured as follows: Section 2 provides a
brief review of the relevant literature that focuses on the complemen­
tarity between innovation and human capital: Section 3 contains general
descriptions of the CGE model used for the analysis: Section 4 explains
the scenario settings considered for simulations: the main results are
presented in Section 5: Lastly, the summary and concluding remarks are
provided in Section 6.
2. Literature review
2.1. Endogenous interaction between innovation and human capital
Previous studies contend that, the ability of an economy to adopt and
utilize known technologies is determined by the level of human capital
accumulation [6,13–17]. In this regard, these studies account for the
effects of human capital accumulation levels on the improvement in
productivity.
However, Krueger and Lindahl [18] find that human capital accu­
mulation levels only have a statistically positive correlation with eco­
nomic growth in countries with relatively low education levels. In this
regard, Vandenbussche et al. [2] point out that it is necessary to
emphasize not only the level effects, but also composition effects in
discussing the relation between human capital and technological inno­
vation in accounting for economic growth. Several studies also empha­
size the close correlation between workers’ skill composition and
innovation levels [6,19]. They highlight that an increase in skilled labor
stock can have growth-enhancing effects, whereas an increase in
low-skilled labor stock can lead to growth-depressing effects. They
contend that the discrepancy between technology and skill can generate
greater complexity in technological innovation and adoption (selection).
Moreover, Krueger and Kumar [20] claim that economic growth is
determined by two types of human capital in terms of the forms of
learning, either general or vocational education. They claim that general
education is highly effective in obtaining competency in using new pro­
duction technology, whereas vocational education is effective in
absorbing already established technology. Similar to this approach, Kim
and Lee [21] propose a theoretical model that incorporates the different
roles of the width and depth of human capital in technology adoption.
They claim that the width of human capital determines the cost of tech­
nology adoption, whereas the depth affects the level of technology that
can be adopted.
These studies commonly emphasize that the composition of skills
possessed by workers in the economic system is an important element in
determining the patterns of technological progress. Accordingly, the
aforementioned studies imply that the heterogeneous composition of
human capital endogenously determines the rates of technological
innovation and adoption, and explains long-run economic growth. In
this regard, previous studies highlight that if there is no mismatch be­
tween “skill distribution” driven by human capital accumulation and
“technology distribution” resulting from innovation, the economic
2
Technology in Society 62 (2020) 101295
growth effects may be greater [11,22].
2.2. Skill-biased technological change and the role of education
Recently, considerations of heterogeneous labor with different skills
in terms of the composition of human capital are extended to the intrinsic
attributes of technological innovation. A wide range of studies based on
this perspective focus on SBTC, claiming that the relation between
workers with different skills (or, knowledge) and innovation is not only
complementary but also substitutable [23–33]. SBTC progress refers to a
non-neutral shift in production function that forms differentiated de­
mand for workers with relatively high skills and knowledge within the
distribution of workers, due to the complementarity between the capital
goods inherent in new technology and labor with advanced skills [30].
Relevant studies argue that the increase in the relative demand for
high-skilled labor driven by SBTC leads to increases in these workers’
relative wages and skills premiums, thereby serving as a key determi­
nant of the deepening of income inequality [9,30,34–44]. For example,
Goldin and Katz [11] investigate the underlying causes of income
inequality in the U.S. economy. From the analysis, they identified the
“race between education and technology” as one of the key factors ac­
counting for the changes in income inequality trends.
Similarly, Acemoglu and Autor [35] conduct decomposition analysis
of the changes in relative demand for labor by expanding the
demand-supply model proposed by Goldin and Katz [11]. They find that
in the U.S. economy, wage inequality has been worsening among pop­
ulation groups in terms of educational attainment levels, and years of
experience. Moreover, Mallick and Sousa [44] verify the positive cor­
relation between technological progress and relative demand for
skilled-unskilled labor. They also highlight the acceleration of SBTC in
manufacturing sectors due to the widespread deployment of digital
technology in recent years.
From this perspective, a growing body of literature emphasizes the
coevolution of labor supply and demand on the basis of changes in labor
supply driven by human capital accumulation, and changes in labor
demand driven by SBTC. Accordingly, recent studies provide policy
implications in terms of human capital investments. For example, Ace­
moglu [13] emphasizes that increases in the wage premium for
skilled-labor induced by SBTC have the possibility to increase the ex­
pected return on educational investment, thereby promoting the supply
of skilled labor. In addition, He and Liu [45] propose a theoretical model
that reflects the endogenous skill accumulation process, along with the
complementarity between skills and capital goods (with embodied
technological progress). They also show that when the government
subsidizes workers for skill accumulation, the skill premium can be
reduced in the long run, whereas social welfare can be improved.
Moreover, Grossman et al. [12] emphasize that balanced growth can
be achieved when the effects of SBTC are counterbalanced by increases
in returns on educational investment. They indicate that returns on
human capital accumulation are endogenously determined by physical
capital accumulation, with a complementary relationship with the years
of schooling. Pan [46] also states that the increase in educational in­
vestment reduces wage differentials between workers, and further pro­
motes long-term economic growth.
These studies imply that the interaction between innovation and
human capital accumulation should be understood as an endogenous
process. They also argue that growth and distribution patterns should be
understood as outcomes of these interactions. To be specific, several
studies theoretically investigate the role of human capital investment in
resolving the deepening income inequality and polarization of wage and
employment structures.
In this regard, they address the potential role of economic incentives
in inducing workers’ engagement in learning to resolve the discrepancy
between skill supply and demand. However, empirical studies that
reflect this perspective using macroeconomic models based on identifi­
able macroeconomic data, are scarce. This hinders an extensive
Y. Yeo and J.-D. Lee
understanding of how channels of effect are formed within the economy
resulting from the endogenous interaction between innovation and
human capital. Furthermore, it is difficult to explain how the long-run
economic growth rates are affected by it. Moreover, the associated
macroeconomic analysis considering demand-supply sides and institu­
tional conditions has not actively conducted.
Within the macroeconomic modelling tradition, the CGE approach is
based on the explicit microeconomic foundations assuming the rational
behavior of economic agents. Although the CGE model is suitable for
investigating medium- and long-run outcomes of permanent policy
changes because it does not take the uncertainty faced by economic
agents into account, this also limits its ability to quantify uncertainty
and fit the model to reality in the dynamic sense, compared with the
dynamic stochastic general equilibrium modelling approach. However,
CGE models contain greater institutional detail with larger scales and
multi-sectors, rather than one integrated sector [47].
Accordingly, CGE models have the advantage of investigating the
sectoral responses of different forms of policy shocks within the insti­
tutional and country-specific contexts in detail. In summary, it can be
understood that CGE models can be useful for policymakers in analyzing
the economy-wide effects of policy changes with institutional details
and predicting the long-run socioeconomic responses of structural pol­
icies [48]. In this context, this study aims to provide the methodological
foundations within a CGE model, where the pace and direction of
technological progress are endogenously determined.
3. Methodological approach: CGE modelling
As noted above, technological innovation generates demand for labor
and human capital through various direct and indirect paths within the
economy, such as the reduction of production costs, spillover effects from
knowledge accumulation, increased product varieties, and scale effects.
In addition, innovation leads to SBTC, thereby bringing about changes in
employment and wage structures [23,49]. Moreover, changes in labor
supply driven by human capital accumulation influence technology se­
lection and adoption. This interrelationship between innovation and
human capital shapes patterns of long-term economic growth. In this
regard, we have chosen the CGE model as a proper methodology, as
mentioned above [33]. The following subsections present methodolog­
ical approaches for constructing datasets, and modelling equations
within the CGE framework developed for the analysis.
3.1. The structure of a social accounting matrix (SAM)
A social accounting matrix (SAM) summarizes the interdependencies
among productive activities, factor markets, income and consumption of
households, income and consumption of governments, and balance of
payments, among others, for the economy as a whole at a point in time.
This SAM serves as an underlying database that describes the baseline
economy in the CGE model by capturing the structure of the economy in
which the income and expenditure equations and associated aggregate
accounting relationships are derived. We have used the 2010
Input–Output table from the Bank of Korea (the central bank of South
Korea), and tax-related data in the 2010 Statistical Yearbook of National
Tax, published by the National Tax Service in Korea to construct the
SAM dataset. In addition, the data on household and government sav­
ings were extracted from national accounts.
Key differences of the SAM developed in this study, compared with
other standard SAMs, are descriptions of R&D activities and
3
Technology in Society 62 (2020) 101295
specifications of labor and household types. In this study we have rep­
resented knowledge as a production factor and introduce knowledge
capital formation in the investment account1 by applying methods
proposed by Yang et al. [50]; Hong et al. [51,52]; and Jung et al. [30].
Within the SAM used in this study, current expenditure on R&D, which
was initially included in intermediate goods transactions, has been
moved to the production factor account. In addition, capital expenditure
on R&D, which was initially included in physical capital formation, has
been moved to the knowledge capital formation account. Furthermore,
the knowledge capital formation account has been classified into private
and public accounts, according to who spent it.
Along with descriptions of the knowledge-related elements within
the SAM, we have also specified the labor and households accounts to
consider the heterogeneity of economic entities. To consider different
types of labor, we have classified the single labor account into three
types, based on educational attainment levels to incorporate heteroge­
neous human capital accumulation for workers. When disaggregating
the single labor input account into three different types of labor within
the SAM, we consider workers who have finished graduate schools (i.e.,
master’s and doctorate degree holders) as high-skilled labor. College and
university graduates are considered skilled labor; whereas, low-skilled
labor is characterized by lower educational attainment levels, such as
high school education or less.
Based on these classifications, we extract information on labor input
and wages by labor type for production activities from satellite data­
sets.2 Furthermore, the households account is also classified into 20
income level quantiles. We use micro-level data from the Household
Income and Expenditure (HIE) Survey issued by Statistics Korea.3 Based
on this dataset, we extract each household’s earnings, consumption
expenditure, physical capital investment, and R&D investment levels
into the SAM. Table A.1 (in Appendix) shows a final form of the SAM,
constructed for the analysis. The numbers in the cells of Table A.1
indicate the size of the matrix of each account.
3.2. The structure of the knowledge-based CGE model
This section provides an overview of the knowledge-based CGE
model designed in this study. In terms of supply- and demand-sides, the
overall structure of the model is illustrated in Figure A.1 in the Appen­
dix.4 The main characteristics of the model are summarized as follows;
1) endogenizing the innovation-related elements considering the char­
acteristics of innovation (including, consideration of knowledge as a
factor of production, endogenization of knowledge capital investments,
and description of spillover effects of knowledge accumulation), 2)
endogenizing the decision-making process of labor on the human capital
accumulation, 3) designing the endogenous interaction between
knowledge capital and human capital accumulation, 4) describing the
intrinsic attributes of technological progress within the production
1
The SAM used in this study accepts the recommendation of the 2008 System
of National Accounts, in order to incorporate additional accounts for knowledge
capital. According to the 1993 System of National Accounts, R&D spending is
treated as intermediate consumption, which is used up in the production
process.
2
We extract labor input and wage levels by labor type for production ac­
tivities from the 2010 Household Income and Expenditure Survey micro data,
from the Korea National Statistical Office, and the 2010 Wage Structure Sta­
tistics from the Ministry of Employment and Labor.
3
For example, in order to specify the heterogeneity of income structures of
households, we utilize the income-related information (including, current in­
comes, labor incomes, business incomes, property incomes, non-current in­
comes, and other incomes) identified from the HIE Survey data. Using this
information, the relative share of each household quantile in the total capital
earnings is calculated.
4
Figures related to the main components of the designed model mentioned in
the text are presented in Appendix A.
Y. Yeo and J.-D. Lee
structures, and 5) establishing the macroeconomic model to simulta­
neously estimate the growth and distribution effects considering het­
erogeneous labor and households.
As Figure A.1 shows, the model can be divided into demand- and
supply-sides. Looking at the supply-side, domestic outputs are produced
with value-added composite and intermediate inputs. In addition, the
value-added composite is assumed to be produced under the multi-level
production functions with high-skilled, skilled, and low-skilled labor,
physical capital, and knowledge capital. Conversely, from the demand-
side of the economy, the produced domestic outputs are exported abroad
or distributed domestically to form domestic demand with imported
goods. Aggregate domestic demand, which is sourced by combining
import goods and domestic goods, consists of investment, intermediate
goods demand, and final consumption by households and government.
Based on this structure, we can systemize the knowledge-based CGE
model by specifying a series of equations that express the behaviors of
each economic actor and their interactions with the production factor
and final goods markets.
In addition, the CGE model developed in this study includes house­
holds, the government, and 28 industries as key entities. Each industrial
sector produces a single commodity under a competitive market with
the problem of profit-maximization, whereas each household faces the
problem of utility-maximization. The government collects taxes and uses
tax revenue to finance the provision of public services under the gov­
ernment balance. In addition, physical and knowledge capital stocks are
accumulated through endogenously determined investments, which are
financed by government and households’ savings. The production fac­
tors considered are labor (i.e., three types of labor: low-skilled, skilled,
and high-skilled) physical capital, and knowledge capital. The main
sources of earnings for the households consist of factor incomes and
government transfers. The government imposes income tax, corporate
tax, indirect tax, and import tariffs on households and production sec­
tors, and tax revenues serve as income sources for the government.
In addition, this model incorporates the small open economy hy­
pothesis, assuming that the Korean economy is small enough compared
with other foreign countries that its influence on world prices or inter­
national trade flows is limited. Therefore, within the proposed CGE
model, all export and import world prices are treated as exogenous terms.
In addition, it is assumed that goods and factors are perfectly mobile
between industries, whereas imported goods and services are considered
as imperfect substitutes for the corresponding domestic commodities
according to Armington’s assumption [53]. Within the CGE framework, a
time-recursive dynamic model is employed to solve sequentially for
updating new equilibrium states. Given the exogenous budget constraints
and market clearing rules, our proposed CGE model is solved in a
dynamically recursive fashion (i.e., year by year) with each period’s static
solutions depending on current and past variables’ values from the base
year to the target year of 2030. In the following subsections, we will
present key components of the model with relevant equations.
3.2.1. Production of final goods in industrial sectors
In a knowledge-based CGE model, we assume that industrial final
goods (Zi ) of each industry i are produced by intermediate inputs (Xj;i ),
and the value-added composite goods (VAi ), following the Leontief
fashion (see Equation (B.1) in the Appendix5). The input coefficient of
value-added (AVAi ) and intermediate inputs required to produce a unit of
output Zi (ax0j;i ) 6 are accounted for the Leontief production function. In
addition, the value-added composite goods (VAi ) are assumed to be
produced under the two-level nested Constant elasticity of substitution
(CES) production function. As the first stage, the HLKi composite is pro­
duced by combining high-skilled labor (L3i Þ, physical capital (Ki Þ, and
5
The main equations mentioned in the text are presented in Appendix B.
6
Symbols with 0 indicate the parameters obtained by variable values of the
SAM of the base year.
4
Technology in Society 62 (2020) 101295
knowledge (Hi Þ, as expressed by Equation (B.2) assuming that these
production factors are complements. Conversely, in the second stage, the
value-added composite goods VAi is assumed to be produced with the
HLKi composite goods, skilled labor (L2i ), and low-skilled labor (L1i ),
assuming that HLKi are substitutes for L2i and L1i (see Equation (B.3)).
This form of the production function for each industrial sector is
chosen to describe factor-biased technological progress (i.e., skill-biased
and capital-biased technological progress) following the methodological
approach of earlier works [30,48,54–56]. Several studies in recent years
highlight that technological progress driven by innovation can affect the
marginal productivity of capital and labor unevenly. In this regard, the
concept of physical capital-biased technological change can be under­
stood as the fact that the relative influence of capital within the pro­
duction process becomes even greater as automated machines, which
are capital-intensive goods, intrude on the domain of human labor. In
this regard, to incorporate SBTC and capital-biased technical change
into the production structure, we have used a two-level nested CES
production function with values for elasticity of substitution. To incor­
porate factor-biased technological change into the production structure,
the value of the elasticity of substitution among L3i , Ki , and Hi is set to be
less than 1 (σ1 ¼ 0:67), whereas the value for HLKi , L2i , and L1i it is
greater than 1 (σ 2 ¼ 1:67Þ [30,57–59].
3.2.2. Production of R&D investment goods in R&D sectors
Following previous studies, including Hong et al. [51,52]; Jung et al.
[30]; and K�rístkov� a [58]; R&D investment goods are assumed to be
produced through separate processes. It is assumed that both private and
public R&D sectors produce R&D investment goods (RDZrdt ;
​ where ​ rdt : private ​ or ​ public) under the Leontief production function
consisting of the value-added composite (RVArdt ) and intermediate inputs
(XVRDrdt ) for R&D activities (see Equation (B.4)). The RVArdt composite is
produced by combining the RHKrdt composite, skilled labor (RL2rdt Þ, and
low-skilled labor (RL1rdt Þ for R&D activities within the two-level CES
production function (Equation (B.6)). Here, the RHKrdt composite is
assumed to be produced by combining the high-skilled labor ðRL3rdt Þ and
physical capital inputs for R&D activities (RKrdt ) at the lower level of
two-level CES production function, as shown in Equation (B.5).
In this regard, the value of the elasticity of substitution between
RL3rdt and RKrdt is also less than 1, whereas among RHKrdt , RL2rdt , and
RL1rdt it is greater than 1, as in previous studies [30,57–59]. These as­
sumptions about the elasticities of substitution values within the R&D
investment goods production function are also associated with the de­
scriptions of the factor-biased technological progress.
When new knowledge is created through R&D investment, it is
accumulated into pre-existing knowledge capital stock, and certain
amounts of knowledge become obsolete at a depreciation rate over time.
It is also assumed that public knowledge stock Hpublic; ​ t is accumulated
through public R&D investments RDZpublic; ​ t with the knowledge
depreciation rate δknow (Equation (B.7)) whereas, private knowledge
stock is accumulated through private R&D investments RDZprivate; ​ t .
RDZprivate;t can be understood as the gross private R&D expenditure,
which is distributed to each industry (IRi;t Þ to build sector-specific
knowledge stock. This is used in the production functions of final
goods producing sectors, as expressed by Equation (B.8).
The distribution of gross private R&D investment goods is endoge­
nously determined by Tobin’s Q logic [60,61]. Furthermore, the per­
petual inventory method is also applied to describe the dynamic
accumulation process of the physical capital stocks (KS ​ t Þ with values of
physical capital investments (INVKt Þ and depreciation rates (δCAP Þ
(Equation (B.9)). Based on these methodological settings, we can depict
the interrelationship between the production structures of final goods
and R&D investment goods, as shown in Figure A.2.
3.2.3. Productivity improvements from knowledge spillover effects
Our model reflects the spillover effects from the knowledge capital
Y. Yeo and J.-D. Lee
accumulation. In the case of private knowledge capital, industry i can
obtain positive externalities from knowledge capital stock accumulated
by other sectors j ​ ðj 6¼ iÞ. It is assumed that the knowledge spillover ef­
fects from other sectors to the individual sector are proportional to the
amounts of intermediate goods transactions based on the approach
proposed by Terleckyj [62] and other studies, including Cerulli and Poti
[63]; Hong et al. [52]; and Jung et al. [30]. As expressed by Equation
(B.10), the value of the knowledge spillover effects embodied in inter­
mediate goods (INTINDSTi ) from other sectors to the i-th sector can be
calculated by multiplying the weighted proportions of other sectors’
intermediate goods used by the i-th sector (other0j;i ) with the other
sectors’ (j ​ ðj 6¼ iÞÞ knowledge capital stocks.
By contrast, public knowledge stock is assumed to be public goods,
being non-rival and non-exclusive [64]. In this context, the i-th sector can
experience productivity improvements with the spillover effects
SPCOEFFi , which can be described as a function of two types of knowledge
stock: other sectors’ knowledge stocks ðINTINDSTi Þ and the public
knowledge capital stock (Hpublic Þ (Equation (B.11)). Accordingly, the
productivity improvements from the knowledge spillover effects are
captured by the changes in the input coefficients for the value-added
composite (AVAi Þ, as expressed by Equation (B.12).7 In addition, within
the CGE framework, domestic R&D expenditure and knowledge capital
stock influence the productivity improvements of industrial sectors,
following the methodological approach proposed by K�rístkova � [57,58].
3.2.4. Human capital formation and its endogenous interaction with
innovation
Following the methodological approaches proposed by Jung and
Thorbecke [65] and Ojha et al. [66]; human capital formation is
modelled as an endogenous process which is determined by the changes
in educational investment (i.e., the availability of educational facilities)
and relative wages among workers. As specified by Equation (B.13), the
labor supply of workers who have completed human capital accumu­
lation from skill level l to skill level u at time t (LSu;t Þ can be described as
the additive function of the level of educational investments in the
!
PLut
economic system (EDUt Þ and the relative wage rate 1
at skill level l
PLlt 1 L3t : high-skilled) in each period are allocated to final goods producing
relative to the wage level at skill level u . 8 sectors and R&D sectors in accordance with their labor demands.
This suggests that workers undertake a skill accumulation process,
considering the expected returns, and the institutional conditions for
learning are shaped by the level of educational investments [65–67].
Within Equation (B.13), ir and gt indicate the discount rate (i.e., interest
rate) and economic growth rates, respectively. Here, ir is assumed to be
constant at the base year’s interest rate. In addition, ρE represents the
elasticity parameter determining the returns on educational in­
vestments, whereas ∅1 and ∅2 represent the relative weight of each
component. These parameter values are adopted from those of Jung and
Thorbecke [65] and Ojha et al. [66].
The aggregate labor stock (LSt ) is calibrated to change in accordance
with the exogenous growth rate of the labor force (glt ) with projection
data from Statistics Korea (see Equation (B.14)). In addition, the labor
flows of different skill levels are interlinked. The outflow of labor that
has completed the human capital formation from low-skilled (l) to
skilled labor (s) is incorporated into the pre-existing skilled labor stocks
(L2t Þ; whereas, the supply of workers who advance from skilled (s) to
high-skilled labor (h) through human capital formation is supplied into
7
In Equation (B.12), ava0i represents the initial vale of the share (i.e., input
coefficients) of the value-added composite in producing final goods calibrated
based on the base year SAM data; whereas, AVAi indicates the newly updated
value for the input coefficients for the value-added composite with the
consideration of the knowledge spillover effects.
8
The detailed derivation of this equation is available in Jung and Thorbecke
[65].
5
Technology in Society 62 (2020) 101295
the pre-existing high-skilled labor stocks (L3t Þ (see Equation (B.15)).
With the changes in the total labor stock constrained by an exogenous
growth rate, the value of the low-skilled labor stock ðL1t Þ is determined
as a residual.
Accordingly, dynamic changes in the human capital composition
through endogenous human capital formation of workers are captured
by Equation (B.15), which shows the relationships between the flows of
labor types of different skill levels and the associated changes in labor
stocks. In Equation (B.15), labdep represents the human capital depre­
ciation rate with the value of 0.015 (1.5%), which is estimated by Ban
[48]. In addition, it is noted that within the CGE model, labor migration
from foreign countries is not considered, assuming that contributions of
foreign workers within the production structure of the final goods pro­
ducing sectors in Korea appear to be negligible.9
Furthermore, we investigate how endogenous interactions between
innovation and human capital are modelled. As described in Figure A.3,
exogenous shocks to human capital investment (EDUt Þ affect a human
capital accumulation process of workers directly, thereby inducing
changes in the supply of workers with higher skills. These changes in
labor supply indirectly affect the rate of return to the knowledge capital
investments, based on the complementary relationship between
knowledge and high-skilled labor as shown in Figure A.2. This can affect
the sector-specific R&D investments (IRi;t Þ for knowledge accumulation
indirectly.10 Conversely, an exogenous policy shock to knowledge cap­
ital investment in the form of changes in R&D intensity will affect the
rate of return to the knowledge capital investment directly. It also
indirectly affects the relative wages of workers, based on the relation­
ship between knowledge capital and types of labor. For example, when
the R&D intensity increases, it leads to higher demand for high-skilled
labor (i.e., a higher value of PL3 PL2t 1 ), which influences the decision-
t 1
making process of workers in terms of human capital accumulation.
In this way, this study has explicitly described the endogenous
interaction between the technological progress driven by R&D in­
vestments and human capital accumulation within the CGE model.
Based on this endogenous interaction between human capital and
knowledge accumulation, the labor stocks (L1t : low-skilled, L2t : skilled,
Figure A.3 represents the main channels describing the interactions
between innovation and human capital accumulation. In addition,
Figure A.4 depicts the relationships between the labor supply side from
human capital accumulation and demand side from the final goods
producing and R&D sectors within CGE framework.
3.2.5. Institutions: Households and government
In the CGE model, we have considered heterogeneous households
classified into 20 income level quantiles. Each household’s total earn­
ings by income quantile consists of wage income, physical capital in­
come, and knowledge capital earnings. The total wage income for each
type of skill (HLINCtype Þ, physical capital income (HKINCÞ, and knowl­
edge capital earnings (HHINCÞ earned by households are expressed by
Equations (B.16), (B.17), and (B.18). Furthermore, the aggregate
household earning from each primary factor described in these equa­
tions is distributed to the 20 household types, in proportion to the share
9
The Korean economy shows relatively low levels of the proportion of im­
migrants in the total national population (i.e., 1.8% of the total population in
the base year, 2010) [80]. In addition, the proportion of foreigners employed in
Korea is approximately 2.6% for the base year [81]. It is noted that Korea has
lower proportions of immigrants in the total population and in employment
compared with other countries because of the passive immigration policy and
complex procedures in visa application and immigration systems [81].
10
The distribution of gross private R&D investment goods is endogenously
determined by Tobin’s Q logic. Therefore, the changes in return to knowledge
capital affect the sector-specific R&D investments.
Y. Yeo and J.-D. Lee
of each income quantile, to characterize the households’ income dis­
tribution. The households’ income is either saved or paid to the gov­
ernment as tax payments. The remaining income is spent on
consumption.
The government earns its income through levying taxes in the form
of indirect taxes, income taxes, corporate taxes, and import tariffs. In­
direct tax (Tz) represents the production tax imposed on the production
outputs of the final goods producing industries and R&D sectors;
whereas, income tax (Tinc) is imposed on household income. Corporate
tax (Tcor) represents the taxation on capital income imposed on the
industrial and R&D sectors; whereas import tariffs (TtarÞ are imposed on
imported goods. Net income (GincÞconsists of tax revenues, government
debt Bg, and household transfers TGhh (see Equation (B.19)), and is used
for savings ðSGÞ and consumption expenditure by the government (XgÞ.
It is also assumed that most government revenue is spent on gov­
ernment consumption (XgÞ and saving ðSGÞ, and a certain part is allo­
cated to household transfer. In addition, the government debt (Bg) is
assumed to be constant as an initial value in the base year. Based on
these assumptions, the government balance follows the condition by
which the government’s consumption expenditure is endogenously
determined as the difference between the government disposable in­
come and gross savings. In addition, the government’s consumption
structure is reflected within the model, based on the relative share of
each industrial sector within the gross government consumption
expenditure (μ0i Þ, drawn from the base year SAM data, which can be
expressed as Equation (B.20).
Furthermore, it is assumed within the model that investment in­
tensities are exogenously determined as policy variables, whereas sav­
ings are adjusted. These budget balance constraints determine the
government’s choices in terms of savings and consumption. Further­
more, our CGE model does not consider the specifications of financial
assets, such as deposits, equities, and government bonds, similar to other
standard CGE models [68,69]. Under our CGE framework, market
closure conditions are satisfied by the manner in which household and
government savings are equal to the gross investment demand. In
addition, for the commodity and production factor markets, demand and
supply are balanced and income equals expenditure.
4. Policy scenario settings
4.1. Business-as-usual (BAU) scenario
The CGE model with the features described above describes Korea’s
economic situation through 2030, based on its exogenous projections.
The scenario assuming that there are no exogenous policy shocks from
the base year 2010 to 2030 is called “Business-as-usual” (BAU) scenario.
We have used the projection data for the working age population from
Statistics Korea to describe the change in the aggregate labor stocks in
constructing the BAU scenario. In addition, for the BAU scenario, it is
assumed that 4% of Korea’s R&D investment intensity (measured as the
ratio of R&D investment to GDP) in the base year 2010 will be main­
tained continuously until 2030; whereas, investment expenditure on
education relative to GDP is assumed to be maintained at 8.6% (as of
2010) until 2030.
4.2. Policy scenario settings
Within the recursive dynamic model, we assume that R&D invest­
ment intensities are exogenously determined as one of policy variables,
while savings are adjusted according to the R&D intensity (i.e.,
investment-driven model). According to the policy scenarios, different
levels of R&D investments will affect the dynamic changes of knowledge
stocks accumulation, which further influences the production activities
of industrial sectors. In addition, we have considered the educational
investment intensity as another policy variable. From the dynamic
sense, it is designed that the changes of labor stocks induced by changes
6
Technology in Society 62 (2020) 101295
of educational investment affect the individual sectors’ production
functions.
For the analysis, three policy scenarios are constructed to analyze the
macroeconomic effects of individual scenarios by imposing variants of
the R&D and educational investment intensities. These constructed
policy scenarios are described as follows. The first scenario (SCN1) as­
sumes that R&D intensity is set to 1%p higher than that of BAU and
education investment intensity remains the same. SCN1 is constructed to
identify the individual role of R&D investment, and its indirect effects on
human capital accumulation. The second policy scenario (SCN2) as­
sumes that education investment intensity is set be 1%p greater than
that of BAU, and R&D intensity is set to be the same as BAU. This sce­
nario is constructed to investigate the independent role of human capital
investment, and its indirect impact on R&D investment. The last sce­
nario (SCN3) assumes that R&D intensity is 0.5%p higher than that of
the BAU scenario, and educational investment intensity is also 0.5%p
higher than that of BAU. The construction of SCN3 enables us to analyze
the complementarity between R&D and educational investments, and
the effects of their interaction in the economy.
The gross changes in the exogenous R&D and educational investment
intensities in SCN1, SCN2, and SCN3 are all the same, that is, a 1%p
increase relative to the BAU scenario. The absolute levels of change in
R&D and educational investment levels considered in the policy sce­
narios are all the same (see Figure A.5). These scenarios are intended to
investigate and understand the direct and indirect paths within the na­
tional economy driven by the endogenous interaction between innova­
tion and human capital accumulation. Based on the key findings drawn
from our CGE model, this study aims to draw policy implications in
terms of designing and formulating innovation policy.
5. Results analysis
5.1. Effects on economic growth
In this subsection, we present the main results generated by the con­
structed policy scenarios by comparing the changes in variables associ­
ated with economic growth rate. Fig. 1 shows the changes in the GDP
levels in the constructed policy scenarios, compared with the BAU level.
SCN3 stimulates the highest economic growth (19.33% higher compared
with the BAU level in 2030), followed by SCN1 and SCN2, as represented
in Fig. 1. It can be understood that the highest economic growth is ach­
ieved under SCN3; whereas, SCN2 shows the lowest growth rate.
More specifically, we proceed below by examining the relevant
impact channels that affect the different growth patterns generated by the
policy scenarios. For SCN1, policy shock directly increases the level of
knowledge capital accumulation and thereby enhance the positive
external effects of knowledge capital accumulation compared with BAU.
Moreover, it leads to additional demand for other factors of production,
Fig. 1. Changes of GDP level (Unit: % change relative to BAU).
<Source: Authors’ own elaboration based on simulated results>
Y. Yeo and J.-D. Lee Technology in Society 62 (2020) 101295

based on the complementarity between knowledge, physical capital, and high-skilled and lower skilled workers. It also implies the presence of the
high-skilled labor, thereby creating scale effects as indirect impact skill premium for more educated labor, driven by shifts in the compo­
channels. sition of labor demand toward workers who have higher skill levels.
By contrast, in SCN2, when the policy shock is an increase in education By contrast, SCN2 shows the lowest employment growth (high-skil­
investment intensity, the direct effects to human capital accumulation of led: 3.77%, skilled: 8.30%, low-skilled labor: 8.29% higher than BAU in
workers are expanded. With the growth in newly educated workers, the 2030) among the policy scenarios. In addition, the employment growth
proportions of high-skilled to skilled workers increase, leading to the level of high-skilled labor is shown to be the lowest. This suggests that
expansion of innovation activities based on complementary relations increases in the profitability of high-skilled labor are limited when an
between knowledge and high-skilled labor. Accordingly, this induces increase in educational investment is not accompanied by additional
scale effects that drive economic growth. It is noted that R&D and R&D investment. We can infer that reduced profitability for the high-
educational investments respectively create different direct and indirect skilled labor can constrain the learning process of workers, which
effect channels. The differences in the GDP levels between SCN1 and again limits the expansion of the high-skilled labor supply. High returns
SCN2 imply that the growth effect of technological progress led by to skill accumulation would encourage the education, which in turn
exogenous shocks to R&D is relatively greater than that of human capital induce SBTC. However, we can infer that under SCN2, the returns to skill
accumulation driven by exogenous shocks to educational investment. accumulation engaged by workers are not high enough to induce the
Moreover, when the R&D and education investment intensities are increase in relative supply of skilled workers, showing the lowest
increased together as in SCN3, a higher level of economic growth is employment growth of the high-skilled labor among scenarios.
achieved than in the other scenarios. This suggests strong complemen­ Accordingly, the changes in the composition of labor demand generated
tary relationships between innovation and human capital accumulation. by SCN2 imply that supply of skills accompanied by education and skill
In addition, we can understand the importance of the contribution of accumulation is not kept pace with technology-induced changes in the
efficient combination of innovation and human capital to spur long-run production process and shifts in labor demand.
economic growth. Adopting the supply-demand framework, we can However, SCN3 shows a significant increase in demand for all kinds
infer that in SCN3 the disparity between the demand of skills (induced of labor, with the highest level of total employment growth. To be
by R&D investment), and the supply of skills (driven by human capital specific, we also find that SCN3 induces greater increases in high-skilled
accumulation) is somewhat eased, thereby accelerating the endogenous labor, followed by skilled, and low-skilled labor (high-skilled: 22.83%,
interaction between innovation and human capital. The results shown in skilled: 19.87%, low-skilled labor: 19.01% higher than BAU in 2030). As
Fig. 1 suggest that the acceleration of the endogenous interaction be­ Fig. 2 shows, even though the employment level of high-skilled labor is
tween knowledge capital and human capital investment can increase relatively low compared with SCN1, we find that employment growth is
economic growth rate. experienced over all types of labor as a whole under SCN3 compared
with the others. In other words, it can be understood that there are
possibilities to reduce the employment gaps between skilled and un­
5.2. Effects on employment and wage structures skilled workers, driven by SBTC (as shown in SCN1), when additional
investments for R&D and human capital accumulation are made
This subsection shows how changes in the employment and wage together.
structures appear in different scenarios, to understand key factors It suggests that under SCN3 employment opportunities are evenly
behind economic growth. Table 1 illustrates the changes in aggregate distributed to some extent across all workers, compared with SCN1.
employment levels by labor type in 2030 relative to BAU (for SCN1, Accordingly, we can understand that when the relative supply of
SCN2, and SCN3). Total employment grows most (19.98% higher than workers who have higher skill levels grows quickly (via increasing the
BAU in 2030) under SCN3, followed by SCN1, and SCN2 (SCN1: 16.54%; educational investments) enough to meet the disproportionate increase
SCN2: 7.63% higher than BAU in 2030). in the demand for labor embedded in new technological innovation (via
To be specific, when examining the changes in employment by skill increasing the R&D investments), it can alleviate the disparities in
type, the highest level of employment growth in high-skilled labor is employment. In this context, the SCN3 results address the importance of
found (27.58% higher than BAU in 2030) under SCN1. It is noted that the match between skilled labor supply and demand for skilled labor
demand for high-skilled labor is more sensitive to changes in R&D in­ driven by SBTC.
tensity than other labor types. Accordingly, it can be inferred that a The changes in relative wages can be understood as outcomes of the
higher level of innovation could accelerate the skill-bias in technical interaction between the changes in relative labor supply and demand. To
change. Higher sensitivity of high-skilled labor to the changes of R&D be specific, the paths of wage inequality among workers can be inter­
intensity suggests a strong linkage between the technological innovation preted as the outcome of a race between relative supply – driven by ed­
and the degree of skill-bias. To be specific, as shown in Fig. 2, employ­ ucation, and relative demand – driven by technological innovations [70].
ment opportunities for high-skilled labor are to be increased the most in Changes in the composition of the labor market affect the wage dispersion
SCN1, suggesting the largest disparities in employment growth between by changing between-group differences in pay [71]. In this regard,
Table 1 empirical evidence addresses that skill premium in the labor market is an
Changes of employment level by skill type relative to the BAU (Unit: %). important source of wage inequality [72]. Accordingly, Fig. 3 illustrates
changes in the skills premiums, which is calculated as the ratio of the
2015 2020 2025 2030
wages of either skilled (PL2) to low-skilled labor (PL1) (Fig. 3(a)), or
Total employment SCN1 1.80 5.37 10.41 16.54 high-skilled (PL3) to low-skilled labor (PL1) (Fig. 3(b)), compared with
SCN2 0.24 1.52 4.14 7.63
SCN3 0.61 5.47 11.77 19.98
those values in BAU. As can be seen in Fig. 3, SCN1 shows that the skill
Low-skilled labor SCN1 1.16 3.75 8.32 13.82 premiums for high-skilled and skilled labor increase over time.
SCN2 0.44 1.96 4.73 8.29 This is associated with the differential formation of labor demand
SCN3 0.12 4.99 11.14 19.01 induced by SBTC. However, the indirect effects of the expansion of R&D
Skilled labor SCN1 1.59 4.84 9.58 15.28
investment on the supply of newly educated workers are not significant
SCN2 0.40 1.92 4.71 8.30
SCN3 0.59 5.55 11.83 19.87 in SCN1, which can offset the skill premiums, showing the highest levels
High-skilled labor SCN1 4.43 11.61 18.63 27.58 among policy scenarios. It implies that in the case of SCN1, the growth in
SCN2 0.94 1.10 0.70 3.77 the relative demand for skills is accelerated faster than the growth in the
SCN3 2.13 6.47 13.23 22.83 relative supply. Therefore, it can be understood that technological in­
<Source: Authors’ own elaboration based on simulated results> novations driven by increasing R&D intensity is responsible for demand-

7
Y. Yeo and J.-D. Lee
Fig. 2. Comparison of labor supply and demand levels by policy scenario compared to BAU (Unit: %).
<Source: Authors’ own elaboration based on simulated results>
Fig. 3. Changes in skill premiums relative to BAU (Unit: %).
<Source: Authors’ own elaboration based on simulated results>
side acceleration in determining the relative wages among workers.
Based on this result, it is noted that rise of skill premiums for workers
with higher skills has possibilities to increase the wage gaps between
high-skilled and relatively low-skilled workers. Therefore, it suggests
that technical progress solely driven by increasing R&D investments has
potentials to significantly increase the returns to skills and, thereby
wage inequalities.
8
Technology in Society 62 (2020) 101295
Conversely, under SCN2 the skill premiums for skilled and high-
skilled labor decline the most. It can be understood that the expansion
in supply of newly educated workers prevails over the demand for
workers with advanced skills in determining their relative wages. The
relative wage rate for the more educated high-skill workers can be partly
understood as a decreasing function of relative supply of skills [11,70].
In this regard, the lowest skill premiums appeared in SCN2 suggest that
Y. Yeo and J.-D. Lee
the relative supply of workers with higher skill levels outpaces the
expansion in the relative demand. Accordingly, it is noted that education
could serve as a braking system to resolve wage inequality as noted by
Cozzens and Wetmore [73]. The results also suggest that skills upgrad­
ing and human capital accumulation of workers have potentials to
counteract the growth of inequality induced by technological progress.
Moreover, in SCN3, the relative wages of skilled and high-skilled
workers are lower than BAU. However, the decreases in the skill pre­
miums of skilled and high-skilled workers are relatively low, compared
with those in SCN2. Considering that technology is crucial element for
wage inequality as shown in SCN1, the results of SCN3 suggest that the
technological progress combined with education and R&D investments
can mitigate the wage inequality problem. The decrease in skill pre­
miums compared to BAU implies that relative supply of skills outpaces
the expansion in the relative demand.
A higher demand for high-skilled and skilled workers triggered by
SBTC is largely linked to the increases in their skill premiums: whereas,
the expansion in labor supply of workers after completing the human
capital accumulation is associated with decreases in the skill premiums.
Furthermore, the additional outflow of newly educated workers may be
an indirect effect of R&D investment. Considering these complex in­
teractions, it can be understood that under SCN3 the effects of labor
supply with accumulated human capital are greater than the increase in
demand for skilled and high-skilled workers in shaping skill premiums.
Based on these results, it can be understood that the quantitative
expansion of R&D investment leads to rising wage inequalities by
increasing the skill premiums. However, when the innovation and
human capital accumulation of workers are come together as in SCN3, it
is found that the discrepancy between the skill demand and supply can
be alleviated. This also implies the possibility of offsetting the increase
in skill premiums of skilled and high-skilled labor and solving the wage
gap between workers. Based on those results, it is noted that when
educational infrastructure is expanded with additional investments to
support workers to move up the skill ladder, it can counteract the growth
of wage inequality induced by the increase in R&D investments.
High wage inequality can also be correlated with increasing house­
hold income inequality. To investigate how the household’s earning is
distributed, the decile distribution ratio is calculated for constructed
scenarios. This index is defined as the share of the top 20% in relation to
the bottom 40% in terms of income distribution [30]. It can help in
building intuition of the distributional impacts of policy scenarios on
household’s income. Fig. 4 depicts the time series trends of the decile
distribution for constructed scenarios. As shown in Fig. 4, SCN2 shows
the smallest value. Based on this result, it is confirmed that education
can play an important role to resolve income inequality.
On the other hand, it is found that the decile ratio in SCN1 shows the
highest value (3.017 in 2030), whereas SCN3 shows relatively lower
value (3.007 in 2030). The gross household income in each quantile is
determined by the endowments of production factors. Based on those
results, we can infer that the highest income inequalities in SCN1 is
largely associated with the fact that higher income classes are actively
engaged in high-skilled works, and benefited from greater skill pre­
miums. On the other hand, the inequality reducing effects of SCN3 can
be explained by lower levels of skill premiums between the high-skilled
and lower skilled, compared with SCN1.
5.3. Effects on industrial production and productivity growth
In this subsection, we investigate changes in industrial production
and spillover effects for each scenario. To measure the distribution of
industrial outputs, National Average Index (NAI) values are calculated
for all the policy scenarios. The NAI is used to measure the diversity and
concentration of industries in the local economy [74]. Based on this
concept, the relative share of each industry within the total industrial
outputs (Pi ) in the target year of 2030 for each scenario has been
calculated to derive the NAI value. When the relative share of each
9
Technology in Society 62 (2020) 101295
Fig. 4. The decile distribution ratio for all three policy scenarios.
<Source: Authors’ own elaboration based on simulated results>
industry within the total industrial outputs is found to be Mi in 2030 for
the BAU scenario, the NAI for each scenario can be calculated as NAI ¼
� �
P ðPi Mi Þ2
​ Mi . The closer the NAI is to zero, the smaller the industrial
i
concentration and imbalance are.
In addition, we calculate the entropy index. This concept is used to
measure the concentration of the industrial structure, based on the
number of industries and their market shares in the economic system. It
P
can be calculated as E ¼ Ni¼1 Si ⋅log Si , where Si indicates the relative
share of each industry in 2030 for each scenario. The smaller the entropy
index, the higher the degree of monopoly and concentration.
Accordingly, the values for the NAI and entropy index for all three
policy scenarios (in 2030) are shown in Table 2. SCN1 shows the highest
industrial concentration (NAI: 0.03896; entropy index: 2.97246);
whereas, SCN3 shows the lowest concentration (NAI: 0.02749; entropy
index: 2.99676). It can be understood that the policy intervention limited
to the quantitative expansion of the R&D investment (SCN1) spurs eco­
nomic growth by increasing the concentration of industrial structures. To
be specific, it is found that under SCN1 the growth effects of industrial
outputs in the high-tech manufacturing sector are highest compared with
other scenarios (39.82% higher relative to BAU in 2030), (see Table 3,11).
It suggests that SBTC leads to structural change, benefiting industrial
sectors with larger shares of knowledge and high-skilled labor.
Conversely, policy intervention that promotes endogenous interac­
tion between innovation and human capital formation, such as SCN3,
achieves the highest level of economic growth based on the diversified
industrial structure with growth effects being spread evenly across
sectors. To be specific, SCN3 shows relatively higher industrial output
growth effects across all industrial sectors (high-tech manufacturing:
35.00%; low-tech manufacturing: 13.44%; service: 12.89%; primary
sectors: 5.86% higher relative to BAU in 2030) (see Table 3).
Table 2
Comparison of values for NAI and Entropy in 2030.
SCN1 SCN2 SCN3
National Average Index (NAI) 0.03896 0.00369 0.02749
Entropy Index 2.97246 3.04789 2.99676
<Source: Authors’ own elaboration based on simulated results>
11
For the analysis, we reclassify the 28 industries into four types; 1) primary
industries, which contain agriculture, forestry, and fisheries; 2) low-tech
manufacturing industries; 3) high-tech manufacturing industries; and 4) ser­
vice industries. The classification between high-tech and low-tech
manufacturing industries is based on whether the R&D intensity is higher
than the average level of R&D intensity among manufacturing industries.
Y. Yeo and J.-D. Lee Technology in Society 62 (2020) 101295

Table 3
Changes in industrial outputs relative to BAU (Unit: %).
2015 2020 2025 2030

Total industry SCN1 2.69 7.10 11.48 16.79

SCN2 0.99 0.23 2.63 5.84
SCN3 1.35 5.71 11.31 18.51
Primary industry SCN1 1.75 4.53 2.66 1.03
SCN2 0.78 0.09 1.79 3.90
SCN3 4.01 0.94 2.34 5.86
Low-tech manufacturing SCN1 3.69 8.44 10.79 12.83
SCN2 1.69 0.68 1.11 3.24
SCN3 2.08 5.70 9.45 13.44
High-tech manufacturing SCN1 6.93 18.66 27.28 39.82
SCN2 1.90 0.44 2.95 8.23
SCN3 6.27 12.07 21.21 35.00
Service SCN1 0.62 0.91 2.52 6.38
SCN2 0.16 1.41 3.70 6.55
SCN3 2.11 1.93 6.87 12.89 Fig. 5. R&D inducement effects for all three policy scenarios relative to BAU
(Unit: %).
<Source: Authors’ own elaboration based on simulated results> <Source: Authors’ own elaboration based on simulated results>
This suggests that SCN1 can lead to unbalanced economic growth, This argument is supported by Fig. 6 which illustrates the compari­
which drives the greater levels of industry concentration with the son of the variable INTINDSTi representing the level of knowledge
highest expansion of knowledge-intensive manufacturing sectors. The spillover effects from other industries to individual sectors. As shown in
shifts in industrial structure towards high-tech and knowledge-intensive Fig. 6, it is found that SCN3 reveals relatively higher values of INTINDSTi
industries have possibilities to weaken the economic foundations by across industrial sectors compared with other scenarios, suggesting the
further reinforcing the widening wage inequalities in the labor market highest knowledge externalities among scenarios. The achievement of
(i.e., disproportionately increasing demand for high-skilled workers and higher levels of industrial diversification can spur greater sectoral pro­
providing higher skill premiums), and being susceptible to volatility ductive linkages, which stimulates the technology transfers and ab­
related to economic downturns [30,75–78]. By contrast, it can be un­ sorptions of industrial sectors [79]. In this regard, it is noted that greater
derstood that SCN3 has the potential to alleviate the disparity problems diversification of productive structure could generate higher spillover
in terms of industrial production and wage distribution. effects, and knowledge externalities through enhancing absorptive ca­
It is also important to investigate the relationship between the vari­ pacities of industrial sectors, as shown in the results of SCN3.
ants in industrial outputs and productivity growth in the entire economy, From these results, we note that holistic innovation policy considers
as productivity and innovation are key engines of long-run economic that inter-linkages between R&D investment and educational invest­
growth. In this regard, Fig. 5 depicts the time series trends in R&D ment should be prepared to facilitate long-run economic growth, not
inducement effects of policy scenarios. As shown in Fig. 5, SCN1 induces merely focusing on the quantitative expansion of R&D investment. In
the highest level of R&D investment from the private sector (43.02% other words, this study’s findings suggest that policy measures to in­
higher relative to BAU level in 2030), followed by SCN3 and SCN2. crease the efficiency of R&D investment should be proposed considering
The R&D inducement effects generated by the policy scenarios can be the endogenous interaction between innovation and human capital.
interpreted as follows. The high R&D inducement effects found in SCN1
are associated with the increase in the exogenous R&D intensity, which is 6. Conclusions and discussions
assumed to be the largest. Although the R&D intensity is set to be the same
as that of BAU, SCN2 shows a higher level of R&D inducement compared In this study, we performed a quantitative analysis to investigate a
with BAU. This is because human capital accumulation and skill growth strategy for the Korean economy, focusing on the potential roles
upgrading of workers indirectly affect knowledge accumulation. In of innovation and human capital. For the analysis, this study proposed a
addition, the R&D inducement effects generated by SCN3 can be under­ CGE model by incorporating endogenous interaction between factor-
stood as the outcomes of the endogenous interaction between knowledge biased technological progress and human capital accumulation. Based
and human capital accumulation. Even though R&D intensity is exoge­ on this model, we have examined how long-term economic growth ef­
nously assumed to be half that in SCN1, SCN3 shows R&D inducement fects are achieved through combining R&D and human capital in­
effects which are only 8.77%p lower than those in SCN1. vestments. To be specific, this study attempted to investigate the key
Furthermore, Table 4 illustrates the changes in total factor produc­ effect channels that determine the interaction effects between knowl­
tivity (TFP)12 in industrial sectors for each scenario compared with BAU. edge and human capital accumulation.
As can be seen in Table 4, it is found that SCN3 achieves the highest TFP Based on the key findings drawn from the CGE analysis, this study
growth across industries (SCN3: 10.95%; SCN1: 8.44%; SCN2: 4.88% shows that there is a limitation to driving productivity growth and
higher relative to BAU in 2030). These results show that the highest R&D enhancing growth potential when focusing solely on quantitative
inducement effects in SCN1 do not directly lead to the highest produc­ expansion of R&D investment. From the analysis of SCN1, we have
tivity growth. Despite a lower level of R&D inducement effects, SCN3 found that an increase in R&D intensity leads to the accumulation of
reveals the highest productivity growth in industrial sectors. This is knowledge capital in the economic system, thereby promoting knowl­
linked to greater knowledge spillover effects with expansions of pro­ edge spillover effects via productivity growth. Furthermore, it is found
duction activities across industries with the diversified industrial
structure (i.e., more evenly spread output growth effects across in­
dustries as shown in Tables 2 and 3). Table 4
Changes in average TFP across industries relative to BAU in 2030 (Unit: %).
2015 2020 2025 2030
12
As mentioned in the previous Chapter 3, the change in total factor pro­ Average TFP level across industries SCN1 1.48 3.82 6.16 8.44
SCN2 0.19 1.33 2.96 4.83
ductivity (TFP) by industry is captured by comparing the value of the value-
SCN3 0.96 4.31 7.43 10.95
added composite input coefficients (AVAi ) for each scenario with that in BAU
scenario. <Source: Authors’ own elaboration based on simulated results>

10
Y. Yeo and J.-D. Lee
Fig. 6. Comparison of spillover effects values for individual sectors.
<Source: Authors’ own elaboration based on simulated results>
that the complementarity among production factors such as knowledge,
physical capital, and high-skilled labor within production technology
leads to the expansion of scale effects, promoting economic growth.
However, we also found that policies limited to the promotion of R&D
have some limitations: first, they accelerate the labor market in­
equalities in terms of employment and wage structures; second, they
further increase the concentration of knowledge- and innovation-
intensive industries in the economic system, leading to unbalanced
economic growth; third, the intensification of the concentration of
knowledge- and innovation-intensive industries reinforces the labor
market inequalities. Deepening of concentration in the industrial and
wage/employment structures may hinder development of a sound in­
dustrial ecosystem and undermine the growth potential of the economy.
Accordingly, this study suggests that the design and implementation
of innovation policy should consider how to facilitate the efficient com­
bination of R&D and human capital investments. The highest produc­
tivity and long-term economic growth levels shown in SCN3 can be
explained by the fact that when the endogenous interaction between
skills distribution formed by technological innovation (demand-side) and
skills distribution through the human capital accumulation of workers
(supply-side) is promoted, the positive externalities of knowledge accu­
mulation can be further enhanced, leading to a higher economic growth
equilibrium. This suggests that productivity growth driven by the
complementarity between innovation and skill accumulation can serve as
a major growth engine to secure the long-term growth potential of Korea.
In summary, we note that innovation policy that consists of a combination
of R&D and educational investment, can alleviate the labor market in­
equalities, promoting balanced-growth among industrial sectors with
higher productivity improvement and scale effects.
In order to increase the growth potential of the economy, produc­
tivity improvement is indispensable, and it is important to combine R&D
investment and human capital investment to spur productivity growth.
Through CGE analysis, this study suggests that strengthening a com­
plementary relationship between innovation and human capital accu­
mulation is crucial to raise the national economy’s competitiveness. To
promote the endogenous interaction between innovation and human
capital accumulation, human capital investment should include the
establishment of life-long learning systems for workers that help them
improve their skills and knowledge to cope with rapid technological
change. To sustain the knowledge-based economy, with innovation as a
growth engine, the right types of skills and knowledge should be pro­
vided and built up through the learning process. In other words, the
Appendix A. The structure of the developed SAM and CGE model
11
Technology in Society 62 (2020) 101295
educational system should keep pace with technological change and
evolving labor markets. Thus, workplace-based vocational training and
lifelong learning can be considered key elements in upcoming educa­
tional systems. In summary, in order to reinforce the interrelationship
between innovation and human capital accumulation, it is necessary to
include qualitative improvements in education and learning systems
within the economy, which can enhance flexibility and adaptability in
the labor supply in line with changing labor market demand. Further­
more, because there is a time lag from the accumulation of human
capital to the actual labor supply, consideration of various policy al­
ternatives is needed to enhance the link between education systems and
the labor market.
The limitation of this research lies in the underlying assumptions of
the methodological settings. In this study, we have only considered the
domestic human capital and labor market conditions, as well as domestic
R&D expenditure and knowledge stocks (i.e., domestic public and private
knowledge stocks). These methodological specifications are based on the
current weak internalization capabilities of the Korean economy in terms
of inflows of foreign knowledge capital and workers. However, the de­
scriptions of spillover effects and interactions between sectors of different
economies (via inflows of knowledge and human capital) are important
dimensions, which are certainly relevant in a small open economy such as
the Korean economy. Accordingly, the methodological approach pre­
sented can be further extended to investigate the role of international
R&D spillovers and effects of external labor sources. In addition, we have
also assumed an optimal situation with smooth transition of workers,
from low-skilled to skilled labor or from skilled to high-skilled labor,
having limitations of incorporating the possibility of labor market in­
efficiency. Therefore, future research should include in-depth discussions
on the labor market institutions including, labor market rigidities and
labor mobility within the economic system.
Declaration of competing interest
The authors declare no conflict of interest.
Acknowledgements
This work is supported by the STEPI Fellowship 2018 Program Grant,
funded by the Science and Technology Policy Institute (STEPI), and the
National Research Foundation of Korea Grant, funded by the Korean
Government (NRF-2017R1A2B4009376).
 Y. Yeo and J.-D. Lee

Table A.1
Structure of knowledge-based SAM.
Activity Factor inputs Institution Investments Tax ROW Tot.

Intermediate Labor Capital Knowledge Household Government Physical Capital Knowledge capitale Export Import

Private Public
a
Activity Intermediate 28*28 28*20 28*1 28*1 28*1 28*1 28*1
Factor inputs Laborc 3*28 3*1 3*1
Capital 1*28 3*1 3*1
Knowledgee 1*28
Instituti-ons Householdd 20*3 20*1 20*1
Government 1*20 1*1
Investm-ents Physical Capital 1*20 1*1

12
Know. Capital Private 1*20 1*1
Public 1*20 1*1
b
Tax 1*28
ROW Export 1*1
Import 1*28 1*1
Total

<Source: Authors’ own elaborationf>

a
Within the SAM, sectors are classified into 28 sectors.
b
Tax account includes indirect, corporate, income, and tariffs in the SAM.
c
Labor inputs for production of final goods and knowledge production are split into three types; high-skilled, skilled, and low-skilled labor.
d
Household is classified into 20 quantiles based on the income level.
e
In this knowledge-based SAM, knowledge is explicitly presented as one of the factor inputs, and knowledge capital formation account has been added into an investment account.
f
This table is constructed using the I–O table (from the Bank of Korea), Statistical Yearbook of National Tax (from the National Tax Service in Korea), Household Income and Expenditure Survey (from the Statistics
Korea), and Wage Structure Statistics (from the Ministry of Employment and Labor) datasets, based on the methodological approach proposed by previous studies (i.e., [50–52]; and [30]).
Technology in Society 62 (2020) 101295
Y. Yeo and J.-D. Lee Technology in Society 62 (2020) 101295

Fig. A.1. Structure of CGE model in terms of supply- and demand-sides.

<Source: Authors’ own elaboration>

Fig. A.2. Production structures of R&D investment goods and final goods.
<Source: Authors’ own elaboration>

Fig. A.3. Endogenous interaction between innovation and human capital accumulation.
<Source: Authors’ own elaboration>

13
Y. Yeo and J.-D. Lee Technology in Society 62 (2020) 101295

Fig. A.4. Relationships between changes in labor supply and production function.
<Source: Authors’ own elaboration>

Fig. A.5. Constructed policy scenarios for the analysisa (BAU, SCN1, SCN2, SCN3).
<Source: Authors’ own elaboration>.
a
The gross changes in exogenous R&D and educational investment intensities in SCN1, SCN2, and SCN3 are all the same, that is, a 1%p increase
relative to the BAU scenario.

Appendix B. Key equations of CGE model

The model in this paper is run by GAMS (General Algebraic Modelling System). For the sake of convenience, CES (constant elasticity of substi­
tution) functions are denoted by CES(�), and Leontief functions by LT(�). In addition, for the sake of simplicity, time period index t is added to the
equations associated with the dynamics of factor inputs, while i and rdt indices represent industry type, and R&D sector type, respectively. Table B.1
indicates the sectoral classifications considered in the model. Furthermore, Table B.2 summarizes the information of parameters and variables used in
the model, and Table B.3 represents the key parameters’ values with references.

Table B.1
Sectoral classifications.

No. Sectoral classifications

S01 Agriculture, forestry and fishing

S02 Mining and quarrying
(continued on next page)

14
Y. Yeo and J.-D. Lee Technology in Society 62 (2020) 101295

Table B.1 (continued )

No. Sectoral classifications

S03 Food, beverages and tobacco products

S04 Textile and apparel
S05 Wood and paper products
S06 Printing and reproduction of recorded media
S07 Petroleum and coal products
S08 Chemicals, drugs and medicines products
S09 Non-metallic mineral products
S10 Basic metal products
S11 Fabricated metal products except machinery and furniture
S12 General machinery and equipment
S13 Electronic and electrical equipment
S14 Precision instruments
S15 Transportation equipment
S16 Furniture and other manufactured products
S17 Electricity, gas, steam and water supply
S18 Construction
S19 Wholesale and retail trade
S20 Accommodation and food services
S21 Transportation
S22 Communications and broadcasting
S23 Finance and insurance
S24 Real estate and business services
S25 Public administration and defense
S26 Education
S27 Health and social work services
S28 Other services

Table B.2
Key parameters and variables in CGE model.

Sets and indices

i,j Sectors and goods

rdt Type of R&D (public and private)
hh Type of household
type Type of skills (u: low-skilled(1); s: skilled(2); h: high-skilled(3))
t Time (year)
Activity variables
L1(i) Low-skilled labor of sector i
L2(i) Skilled labor of sector i
L3(i) High skilled labor of sector i
K(i) Physical capital of sector i
H(i) Knowledge capital of sector i
X(j,i) Intermediate goods for sector i produced in sector j
VA(i) Value-added composite of sector i
HLK(j) Composite factor from L3, K and H in sector j
Z(i) Final output of sector j
XG(i) Government consumption of sector i
INVK(t) Demand for capital investment
RK(rdt) Physical capital inputs in R&D investment of sector rdt
RL1(rdt) Low-skilled labor inputs in R&D investment of sector rdt
RL2(rdt) Skilled labor inputs in R&D investment of sector rdt
RL3(rdt) High-skilled labor inputs in R&D investment of sector rdt
RVA(rdt) Composite factor from RHK, RLS1, and RLS2 in sector rdt
RHK(rdt) Composite factor from RLS3 and RK in sector rdt
XVRD(rdt,i) Intermediate inputs for R&D sector rdt
RDZ(rdt,t) R&D investment goods produced by sector rdt
IR(i,t) R&D investment demand by sector i
SPCOEFF(i) Spillover coefficients in sector i
INTINDST(i) Inter-industrial spillover in sector i
SG Government saving
LS(s) Newly educated workers from low-skilled to skilled labor
LS(h) Newly educated workers from skilled to high-skilled labor
EDU Total educational investments in time t
L1(t) Low-skilled labor stock in time t
L2(t) Skilled labor stock in time t
L3(t) High-skilled labor stock in time t
LS(t) Total labor stock in time t
KS(t) Capital stock in time t
H(i,t) Knowledge stock for industry i in time t
H(public,t) Public knowledge stock in time t
Price variables
PL1 Factor price(wage) of low-skilled labor
PL2 Factor price(wage) of skilled labor
PL3 Factor price(wage) of high skilled labor
(continued on next page)

15
Y. Yeo and J.-D. Lee Technology in Society 62 (2020) 101295

Table B.2 (continued )

Sets and indices

PK Factor price of physical capital

PH(i) Factor price of knowledge capital in sector i
Tax and income variables
Total(Tz) Total production tax collected from sectors
Total(Tinc) Total income tax collected from households
Total(Tcor) Total corporate tax collected from sectors
Total(Ttar) Total import tariffs collected from imports
TG(hh) Government transfer to household hh
Bg Government debt
Ginc Government income
HLINC(u) Total household income from low-skilled labor
HLINC(s) Total household income from skilled labor
HLINC(h) Total household income from high-skilled labor
HKINC Total household income from physical capital
HHINC Total household income from knowledge capital
Parameters
ava0(i) Value-added composite requirement coefficients for sector i
AVA(i) Value-added requirement coefficient of sector i
σ1 Elasticity of substitution for L3, K, and H in HLK production function
σ2 Elasticity of substitution for L1, L2, and HLK in VA production function
σ3 Elasticity of substitution for RL3 and RK
σ4 Elasticity of substitution for RHK, RL1 and RL2
μ0ðiÞ Government consumption share parameter for sector i
other0(j,i) Interindustry spillover stock weight
spc0(i) Scale parameter in interindustry spillover function
rdelas(i) Interindustry R&D stock elasticity in interindustry spillover function
grdelas(i) Public R&D stock elasticity in interindustry spillover function
ir Interest rate
ρE Labor supply elasticity from educational investments
∅1 Scale parameter for educational investments in labor supply function
∅2 Scale parameter for relative wages in labor supply function
gl(t) Population growth rate
δcap Physical capital depreciation rate
δknow Knowledge capital depreciation rate
labdep Human capital depreciation rate

Table B.3
Lists of key parameters with references.

Sectors Value Reference

σ1 (Elasticity of substitution for L3, K, and H in HLK production function)

All sectors 0.67 [30,59]
σ2 (Elasticity of substitution for L1, L2, and HLK in VA production function)
All sectors 1.67 [30,57,58]
σ3 (Elasticity of substitution for RL3 and RK in RHK production function)
All R&D sectors 0.67 [30,57,58]
σ4 (Elasticity of substitution for RHK, RL1 and RL2 in RVA production function)
All R&D sectors 1.67 [30,57,58]
rdelas(i) (Interindustry R&D stock elasticity in interindustry spillover function)
S01 0.013 [30,51,52]
S02 0.010
S03 0.013
S04 0.152
S05 0.073
S06 0.061
S07 0.008
S08 0.060
S09 0.076
S10 0.037
S11 0.074
S12 0.087
S13 0.097
S14 0.074
S15 0.124
S16 0.140
S17 0.100
S18 0.100
S19 0.010
S20 0.010
S21 0.010
S22 0.150
S23 0.010
S24 0.010
S25 0.010
(continued on next page)

16
Y. Yeo and J.-D. Lee Technology in Society 62 (2020) 101295

Table B.3 (continued )

Sectors Value Reference

S26 0.010
S27 0.010
S28 0.010
grdelas(i) (Public R&D stock elasticity in interindustry spillover function)
All R&D sectors 0.250 [30,51,52]
ρE (Labor supply elasticity from educational investments)
- 0.500 [65,66]
labdep (Human capital depreciation rate)
- 0.015 [48]

Production of final goods in industrial sectors

�
Zi ¼ LT VAi ; Xj;i (B.1)

HLKi ¼ CESðL3i ; Ki ; Hi ; σ 1 Þ (B.2)

VAi ¼ CESðHLKi ; L2i ; L1i ; σ 2 Þ (B.3)

Production of R&D investment goods in R&D sectors
RDZrdt ¼ LTðRVArdt ; XVRDrdt Þ (B.4)

RHKrdt ¼ CESðRL3rdt ; RKrdt ; σ3 Þ (B.5)

RVArdt ¼ CESðRHKrdt ; RL2rdt ; RL1rdt ; σ 4 Þ (B.6)

Hpublic; t ¼ ð1 δknow Þ ⋅ Hpublic;t 1 þ RDZpublic;t 1 (B.7)

Hi; t ¼ ð1 δknow Þ ⋅ Hi;t 1 þ IRi;t 1 (B.8)

KS t ¼ ð1 δCAP Þ ⋅ KSt 1 þ INVKt (B.9)

Productivity improvements from knowledge spillover effects
X
INTINDSTi ¼ other0j;i ⋅Hj (B.10)
j;j6¼i

grdelasi
SPCOEFFi ¼ spc0i ⋅INTINDSTirdelasi ⋅Hpublic (B.11)

AVAi ¼ ava0i =SPCOEFFi (B.12)

Human capital formation and its endogenous interaction with innovation
� �� �
� 1 þ gt
LSu;t ¼ ∅1 ⋅ EDUtρE þ ∅2 ⋅ PLut 1 PLl ⋅ (B.13)
t 1 1 þ ir

LStþ1 ¼ ð1 þ glt Þ ⋅ LSt where ​ LSt ¼ L1t þ L2t þ L3t (B.14)

L1tþ1 ¼ ​ ð1 labdepÞ ⋅ L1t LSs;t L2tþ1 ¼ ð1 labdepÞ ⋅ L2t þ LSs;t LSh;t L3tþ1 ¼ ð1 labdepÞ ⋅ L3t þ LSh;t (B.15)

Institutions: Households and government

X � X �
HLINCtype ¼ Li;type ⋅ PLtype þ RLrdt;type ⋅ PLtype (B.16)
i rdt

X X
HKINC ¼ ðKi ⋅ PKÞ þ ðRKrdt ⋅ PKÞ (B.17)
i rdt

X
HHINC ¼ ðHi ⋅ PHi Þ (B.18)
i

X
Ginc ¼ TotalTZ þ TotalTinc þ TotalTcor þ TotalTtar þ Bg þ TGhh (B.19)
hh

XGi ¼ μ0i ⋅ðGinc SGÞ=PQi (B.20)

Appendix C. Supplementary data

Supplementary data to this article can be found online at https://doi.org/10.1016/j.techsoc.2020.101295.

17
Y. Yeo and J.-D. Lee Technology in Society 62 (2020) 101295

Author contributions statement

All authors worked collectively and significantly contributed to this paper. Yeongjun Yeo provided a thorough literature review, designed the
research, implemented the methodological development, and conducted policy simulations for the analysis. Jeong-Dong Lee supervised its analysis,
interpreted the results, and derived the policy implications. All authors discussed the results and implications and commented on the manuscript at all
stages.

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Yeongjun Yeo is an associate research fellow of National Assembly Futures Institute
(NAFI) in Korea. His recent research interests include innovation and industrial policy,
innovation-driven growth, innovation economics and policy impact assessments.
Jeong-Dong Lee is a professor of Interdisciplinary Graduate Program on Technology
Management, Economics and Policy (TEMEP) at Seoul National University. He also serves
as the Special Advisor to the President on Economy and Science in Korea since 2019. His
main research topics include firm dynamics, productivity and efficiency analysis, evolu­
tionary economics, economics of technological change, etc.