From Solow residual to Solow paradox

Innovations allow high ability workers, through costly investment intraining, to partially separate themselves from the low ability workers.Competition by firms for the high ability workers results in the firmsimplementing the costly new technologies as a screening device. Whensignalling by workers is indeed imperfect, screening by employers ispossible, and the costs of opening a vacancy are small, we show that it ispossible for resources to be devoted to develop a technology, workers tofollow costly training to be able to work with this technology, and firmsspending money on its implementation, although it is common knowledge thatthe new technology has no effect on productivity. Income inequalityincreases along the way within a given cohort of workers. When the costs ofopening a vacancy are large, these conclusions remain valid, whileadditionally more workers invest in training, firms implement more of thenew technology, unemployment arises, income inequality increases even more,production falls in both firms, while measured productivity increases. Sodifferent countries may have different experiences with the introduction ofnew technologies depending on the costs of opening a vacancy in thatcountry. Countries for which the effect on productivity growth seems to bethe largest, may actually be the ones for which the introduction of newtechnologies comes at the largest social cost.