ABSTRACT
This chapter reviews the neoclassical growth model and evaluates its policy implications. It focuses on the endogenous growth theory. This theory highlights the importance of innovation and the diffusion of technology as the factors determining growth. Increases in regional productivity come about by technological progress, from an increased amount of capital per worker, or from correcting a misallocation of resources. Wages that are artificially high—perhaps because of some minimum wage imposed by government or a labor union—cause regional unemployment. Market forces will effectively lead to convergence of regional productivity. Educated labor is a key predictor of the richness and diversity of a regional economic base because it enhances productivity. The chapter explores how agglomeration economies can foster innovation; and how capital, entrepreneurship, and labor combine to create innovation and transmit technological advances. Formal schooling, along with on-the-job training, promotes economic growth because it continuously enriches human capital and consequently the stock of society's knowledge.
