Capital–Skill Complementarity and Inequality in Sweden

Income inequality increased in Sweden during the 1980s and 1990s, as did the returns to higher education. The main conclusion of this study is that increased income inequality between high‐ and low‐skilled workers is demand driven and is due to the presence of capital–skill complementarity in production. Increased investments in new, more efficient capital equipment, along with a slowdown in the growth rate of skilled labor, have raised the ratio of effective capital inputs per skilled worker, which, in turn, has increased the relative demand (and market return) for skilled labor through the capital–skill complementarity mechanism.     

Skill distribution and income disparity in a North‐South trade model

Abstract. What are the impacts of free trade agreement on the welfare of different types of workers in a developed country? What is the impact of free trade on a developed country's income disparity? What is the effect of free trade on the skill distribution of a developed country? The objective of this paper is to address the above questions in a two‐sector general‐equilibrium North‐South trade model in which both countries produce one final good and one high‐tech intermediate input. The final good is produced with the use of a high‐tech intermediate input and unskilled workers. Horizontally differentiated skilled workers produce the high‐tech intermediate input. Each country is populated by a continuum of unskilled workers with differential potential ability. Workers in the North and South can acquire skills by investment in training or education. Thus, skill distribution in the North and South is determined endogenously in the model through a self‐selection process. I characterize two different types of equilibria: a closed‐economy equilibrium without trade and a free trade equilibrium. Then, I investigate the impact of free trade, in the presence of training costs, on the skill distribution within each country, income disparity, and social welfare. JEL classification: D63, F10, J31     

Intra‐industry Trade Liberalization: Why Skilled Workers are More Likely to Support Free Trade

This paper presents a theoretical model and empirical analysis that connects the prevalence of intra‐industry trade with increased wage inequality from trade liberalization in both skilled and unskilled labor abundant countries. The Stolper–Samuelson effect is incorporated into an intra‐industry trade liberalization (intra‐ITL) hypothesis where skilled labor opposes protectionism in all countries engaged in intra‐industry trade because skilled workers gain at the expense of unskilled workers from multilateral trade liberalization within the skill‐intensive sector. We examine empirical evidence on whether skilled individuals are more supportive of trade liberalization than unskilled individuals across 31 countries with different levels of intra‐industry trade and skill endowments. We find that the extent to which countries engage in intra‐industry trade in high‐tech commodities is strongly linked with the intensity of opposition to protection by skilled labor. Regression results strongly support our hypothesis that skilled workers, almost everywhere, are more likely to support free trade.     

A Schumpeterian North–South Growth Model of Trade and Wage Inequality*

The paper presents a dynamic general‐equilibrium model of interindustry North–South trade that is used to analyze the effects of trade liberalization on the Northern wage distribution. Both countries have a low‐tech sector where consumer goods of constant quality are produced by use of unskilled labor. The North also has a high‐tech sector that employs skilled labor and features a quality‐ladder model structure with endogenous growth. Both innovation and skill acquisition rates are endogenously determined. In a balanced trade equilibrium, it is found that Southern‐originated (Northern‐originated) trade liberalization leads to an increase (decrease) in Northern wage inequality both between skilled and unskilled workers and within the group of skilled workers. The endogenous change in the Southern terms of trade determines the direction of change in unskilled wages in both the North and the South.     

Migration,Unemployment, and Skill Downgrading

In this paper, we analyze the labor market impacts of immigration under flexible and rigid labor market regimes. A general equilibrium framework is developed, accounting for skill heterogeneity and labor market frictions, where unemployed medium‐skilled manufacturing workers are downgraded into low‐skilled service jobs, while low‐skilled service workers might end up unemployed. The analytical analysis shows that medium‐skill immigration decreases low‐skilled unemployment under the flexible regime, indicating a complementarity effect, while the rigid regime induces a substitution effect, leading to low‐skilled unemployment. Moreover, it leads to wage polarization. In a numerical analysis, the economic effects of different migration scenarios are quantified.     

Skill‐biased heterogeneous firms,trade liberalization and the skill premium

We propose a theory that rising globalization and rising wage inequality are related because trade liberalization raises the demand facing highly competitive skill‐intensive firms. In our model, only the lowest‐cost firms participate in the global economy exactly along the lines of Melitz ( 2003 ). In addition to differing in their productivity, firms differ in their skill intensity. We model skill‐biased technology as a correlation between skill intensity and technological acumen, and we estimate this correlation to be large using firm‐level data from Chile in 1995. A fall in trade costs leads to both greater trade volumes and an increase in the relative demand for skill, as the lowest‐cost/most‐skilled firms expand to serve the export market while less skill‐intensive non‐exporters retrench in the face of increased import competition. This mechanism works regardless of factor endowment differences, so we provide an explanation for why globalization and wage inequality move together in both skill‐abundant and skill‐scarce countries. In our model countries are net exporters of the services of their abundant factor, but there are no Stolper‐Samuelson effects because import competition affects all domestic firms equally.     

Technology Adoption,Export Status,and Skill Upgrading: Theory and Evidence

This paper develops a model of trade that features heterogeneous firms, technology choice and different types of skilled labor in a general equilibrium framework to explain within‐industry increase in the relative demand for skilled workers. Its main contribution is to investigate the impact of firms' export and technology choice decisions on skill upgrading. Only firms in the upper range of the productivity distribution produce for the foreign market using high‐technology. Since this technology is skilled‐biased, exporters that resort to modern technologies are more skill intensive. Empirical evidence is also provided to support the model's main predictions using plant‐level panel data from Chile's manufacturing sector (1990–1999).     

Stick,Carrot and Skill Acquisition*

We evaluate the impact of specially designed youth unemployment programmes (YUPs), intended to provide young unemployed unskilled workers with skills. If unemployment among skilled workers is lower than among unskilled workers, YUPs imply that unemployment falls. However, YUPs potentially crowd out ordinary training. We set up an equilibrium matching model with endogenous skill choice and examine the impact of an increase in programme participation. We derive a condition for crowding out of ordinary training, as well as a condition for an increase in the skilled labour force and thereby reduced unemployment. The impact of YUPs on welfare and wage dispersion is also considered.     

Greenfield FDI and skill upgrading: A polarized issue

Outbound FDI is often accused of increasing income inequality in developed countries by shifting labour demand from low‐skilled towards high‐skilled workers (wage polarization). In response, we employ data on greenfield FDI that, in contrast to M&As, may be more clearly linked to skill upgrading. Our data also delineate greenfield FDI by sector, function and destination, allowing us to control for different motives and skill intensities for 17 developed countries for 2003–2005. We find that greenfield FDI in support services, e.g., back and front office services, induces polarized skill upgrading, benefitting high‐skilled workers at the expense of medium‐skilled workers, thereby polarizing wages.     

The technological determinants of long‐run inequality

I explore the effect of skill‐biased technological change and unbiased technological progress on long‐run inequality using a theoretical model in which the supply of skilled and unskilled workers is endogenous. The main assumption of the model is that young agents can finance their education and become skilled workers by borrowing against their future income on an imperfect credit market. I show that whenever the rate of unbiased technological progress is sufficiently high there is no steady‐state inequality, independent of the degree of skill bias. If instead the rate of unbiased technological progress is low, then the long‐run skill premium increases with the technological skill bias. Therefore, similarly to the short run, in the long run higher technological skill bias may cause higher inequality. However, contrary to the short run, in the long run unbiased technological progress is more important than technological skill bias in determining inequality. I also discuss how the efficiency of the educational technology and the degree of financial development affect long‐run inequality.     

Trade and inequality in a directed search model with firm and worker heterogeneity

This paper integrates the insight that exporting firms are typically more productive and employ higher‐skilled workers into a directed search model of the labour market. The model generates a skill premium as well as residual wage inequality among identical workers. A trade liberalization increases the skill premium and likely increases residual inequality among high‐skilled workers. The calibrated model generates results consistent with the prior literature examining the effect of the Canada‐US Free Trade Agreement on the Canadian labour market: a significant decrease in employment in manufacturing, but only a small change in unemployment and wages.     

Globalization,product differentiation,and wage inequality

Abstract This paper develops a two‐country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intra‐industry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. As long as some industries remain shielded from international competition, the welfare implications of globalization are found to be generally ambiguous.     

Globalization and the Inequality–Unemployment Tradeoff

Over the last 20 years, advanced economies have experienced an “unemployment versus inequality” tradeoff that is critically uneven across countries. To explain this, we propose an extended HOS model in which: the factors are skilled and unskilled labor; there is a continuum of goods; the world comprises two North countries (one egalitarian and one nonegalitarian) and the South; there is no factor price equalization; globalization consists in the South cornering a growing share of world production. In the North, globalization entails an inequality–unemployment tradeoff and the adjustment to globalization is more painful for the country that was initially inequality‐oriented.     

Does Trade Increase Inequality when Skills are Endogenous?

The paper explores the role of government policies in a situation where the wage gap between high‐skilled and low‐skilled workers is widening owing to increasing foreign competition in low‐skilled intensive goods. A two‐period, three‐sector general‐equilibrium model of a small open economy is developed in which individuals choose whether to invest in skills or not. The government influences individual decision‐making through its tax system. The paper shows that increasing import competition or lowering taxes on skilled workers widens inequality when the skill distribution is exogenous (the direct effect), but often the opposite occurs through the indirect effect, that is through the additional incentive to become skilled. Numerical results indicate that there exists a nonmonotonic relationship between the terms of trade and inequality. The indirect effect tends to dominate the direct effect when import competition is intense, and vice versa.     

Skills,Tasks and the Scarcity of Talent in a Global Economy

The scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates the role of labor market imperfection in open economies for the usage of talent in the production process of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum of tasks that differ in complexity. Firms hire low‐skilled and high‐skilled workers to perform these tasks. How firms assign workers to tasks depends on factor prices for the two skill types and the productivity advantage of high‐skilled workers in the performance of complex tasks. I study the firms’ assignment problem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding minimum wage for low‐skilled workers. Since the minimum wage lowers the skill premium, it increases the range of tasks performed by high‐skilled workers, which enhances the stock of knowledge within firms to solve complex tasks and reduces the mass of active firms. In a setting with fully flexible wages trade does not affect the firm‐internal assignment of workers to tasks. On the contrary, if low‐skilled wages are fixed by a minimum wage, trade renders high‐skilled workers a scarce resource and reduces the range of tasks performed by this skill type with negative consequences for the human capital stock within firms. In this case, trade leads to higher per‐capita income for both skill types and thus to higher welfare in the open than in the closed economy, whereas – somewhat counter‐intuitive – inequality between the two skill types decreases, as more low‐skilled workers find employment in the production process.     

PUBLIC FINANCE AND INDIVIDUAL PREFERENCES OVER GLOBALIZATION STRATEGIES

Do preferences toward globalization strategies vary across public‐finance regimes? In this paper, we use data on individual preferences toward immigration and trade policy to examine how pre‐tax and post‐tax cleavages differ across globalization strategies and state fiscal jurisdictions. High exposure to immigrant fiscal pressures reduces support for freer immigration among U.S. natives, especially the more skilled. The magnitude of this post‐tax fiscal cleavage is comparable to the pre‐tax labor‐market effects of skill itself. There is no public‐finance variation in opinion over trade policy, consistent with U.S. trade policy having negligible fiscal‐policy impacts. Public finance thus appears to shape opinions toward globalization strategies.     

The Skill Premium, Technological Change and Appropriability

This paper demonstrates that an increase in the relative supply of educated workers generates a structural change in the production structure towards a knowledge-intensive production process. This structural shift may ultimately lead to an increase in the return to educated labor despite the increase in their supply. The paper argues that the steady increase in the supply of educated workers that most Western economies have experienced in recent decades may be viewed as the driving force behind the observed pattern of wage inequality. In particular, the paper demonstrates that if firms can appropriate a sufficient share of the intertemporal return from knowledge generating activities of their labor force, a gradual increase in the supply of skilled workers would generate only a temporary reduction in the skill premium followed by a permanent increase in the return to skill.     

Skill Composition,Fertility, and Economic Growth

While high fertility persists in the poorest countries and fertility declines with per capita income in developing countries, fertility and per capita income are now positively associated across most developed countries. This paper presents a model where a U‐shaped relationship between overall fertility and per capita income reflects within country differences in workforce skill composition and household choice of occupation, fertility, and childrearing. The fraction of skilled workers rises with economic growth. By allowing for both differences in the fertility of skilled and unskilled workers and purchased childrearing inputs, we explain a poverty trap with high fertility, fertility decline with economic development, and the possible reversal of fertility decline in a developed economy where most workers are skilled.     

Unskilled immigration,technical progress,and wages—Role of the household sector

This paper revisits the relationship between unskilled immigration and skilled wage in the context of the BREXIT episode. Our simple general equilibrium model introduces a household sector, the inclusion of which shows that both return to capital and effective skilled wage may increase with a greater inflow of immigrants. This is a novel outcome in the theory of trade and factor flows. In addition, though technical progress in a skill‐intensive sector raises wage inequality, it no longer displaces traditional jobs. Here, the usual negative impact of unskilled immigration on the traditional sector is mitigated by increased returns to the unskilled workers.     

Effect of the Tax System ON R&D Intensity,Growth, Wages and Consumption Share

We propose a general equilibrium knowledge‐driven (semi‐)endogenous‐growth model with horizontal R&D, which is extended to consider two types of labour, skilled and unskilled, and exogenous government expenditure, financed through taxes on financial assets and on labour income, to analyse the implications of the tax system on R&D intensity, economic growth, wage inequality and consumption share in the output. In particular, we show that: (i) taxes have negative influence in the consumption share, being higher the marginal effect of the labour‐income tax; (ii) for any given government expenditure share, an increase (a decrease) in financial‐assets tax decreases (increases) the labour‐income tax; (iii) only the financial‐assets tax affects negatively the R&D intensity and the skill‐premium; thus, to reduce the skill‐premium the financial‐assets tax must increase; (iv) ignoring the effect on wage inequality and on R&D intensity, taxes are substitutes.