Describe the Mankiw-Romer-Weil extension to the neoclassical model to include human capital. Explain why diminishing returns to capital do not take place in the AK model.

Another option consists in combining the models of growth designed by Solow and Mankiw, Romer, Weil with the Solow 119791 and Summers (19881 models Of efficiency wages (cf. Tokarski, (2003b)). The two types Of models are put together with a view to endogenising labour demand and the number of employees within a growth model. The major conclusions provided by the procedure are as follows. Firstly, when economic growth shows long-run equilibrium, the rates Of growth Of the number Of employees are positively deterrnined by the rate Of physical capital growth (Or by the rates Of growth Of

physical and human capital, depending on the specification of the production function), the rate of technological progress and the rate Of growth Of exogenous labour supply. Secondly, the long-run rate of growth of the number of employees is the higher, the less sensitive wages are to changing labour productivity and the rate Of unemployment. In the 1990s, the leading representatives Of new Keynesian economics — Mankiw, Romer and Weil — designed a model drawing directly on the Solow neoclassical model (Mankiw, Romer and Weil called it an augmented Solow model). This model was an extension of the Solow model in the sense that the Cobb-Douglas production function (in the neoclassical model of growth) was added another production factor (human capital) and the model also received an endogenous equation accounting for an increase in the stock Of human capital. In the Mankiw-Romer-Weil model, the following assumptions are made: l. The ___ __________ ___ __________ ________ _____ ___ ________.
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