Persistent income gaps in an occupational choice model with multi‐goods

In this study, we propose a theory to explain why income gaps persist. We model a simple overlapping‐generations economy with three consumption goods and two types of workers. We find that high‐skilled workers have comparative advantage in skill‐intensive jobs and low‐skilled workers in less skill‐intensive jobs. This pattern of comparative advantage determines occupational choices by workers. Combined with human capital accumulation, the occupational choices widen income gaps between families. At the same time, the relative price of skill‐intensive goods declines owing to productivity improvement. The decline holds back income gaps from exploding. The implications of skill‐biased technological change are also examined.     

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.     

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.     

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.     

Rural-to-urban migration, human capital, and agglomeration

A new general-equilibrium model that links together rural-to-urban migration, the externality effect of the average level of human capital, and agglomeration economies shows that in developing countries, unrestricted rural-to-urban migration reduces the average income of both rural and urban dwellers in equilibrium. Various measures aimed at curtailing rural-to-urban migration by unskilled workers can lead to a Pareto improvement for both the urban and rural dwellers. In addition, the government can raise social welfare by reducing the migration of skilled workers to the city. Moreover, without a restriction on rural-to-urban migration, a government's efforts to increase educational expenditure and thereby the number of skilled workers may not increase wage rates in the rural or urban areas.     

APPROPRIATE TECHNOLOGY AND INCOME DIFFERENCES

This article studies the relative productivity of skilled to unskilled workers across countries. Relative productivities are broken down into the human capital embodied in skilled workers and relative physical productivities (reflecting production techniques). I find that skilled workers from poorer countries embody less human capital and are also relatively less physically productive. Furthermore, results show that production techniques are inappropriate for most low‐income countries, and these countries experience large increases in GDP per capita by increasing the relative physical productivity of skilled to unskilled workers. This suggests that there are significant barriers to the adoption of skill‐complementary technologies.     

To educate or not to educate: Impact of public policies in developing countries

It is well-known in the empirical literature that present-oriented individuals are less likely to go to college as compared to forward looking individuals. There is compelling evidence of a high percentage of dropouts from high schools in poor countries. The endogenous sorting of homogeneous workers into skilled and unskilled types might be the outcome of exposure to income risk and an individual's aversion to risk. We obtain the critical risk aversion associated with income levels above which no individual chooses education. Broad-based economic policies may have perverse impact on educational attainments of individuals. We argue that such an analysis has been largely neglected in related studies. This outcome may also be undesirable from the perspective of a social planner. To address this, we suggest a sector-specific tax-subsidy scheme as a corrective instrument of public policy.     

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,environment, and income inequality: An optimal taxation approach

In a small open economy, how should a government pursuing both environmental and redistributive objectives design domestic taxes when redistribution is costly? And how does trade liberalization affect the economy's levels of pollution and inequalities, when taxes are optimally and endogenously adjusted? Using a general equilibrium model under asymmetric information with two goods, two factors (skilled and unskilled labor), and pollution, this paper characterizes the optimal mixed tax system (nonlinear income tax and linear commodity and production taxes/subsidies) with both production and consumption externalities. While optimal income taxes are not directly affected by environmental externalities, conditions are derived under which under‐ or over‐internalization of social marginal damage is optimal for redistributive considerations. Assuming that redistribution operates in favor of the unskilled workers and that the dirty sector is intensive in unskilled labor, simulations suggest that trade liberalization involves a clear trade‐off between the reduction of inequalities and the control of pollution when the source of externality is only production; this is not necessarily true with a consumption externality. Finally, an increase in the willingness to redistribute income toward the unskilled results paradoxically in less pollution and more income inequalities.     

Credible redistribution policy and skilled migration

We analyze the joint determination of income redistribution and migration flows across fiscally independent regions. In our model, regional governments lack commitment so their policy announcements must be credible, and redistribution between skilled and unskilled workers is bounded by informational constraints. In any given region, the welfare of all workers is increasing in the share of skilled workers, as after-tax incomes increase for both skilled and unskilled workers. When skilled workers are more geographically mobile than unskilled ones, the endogenous response of redistribution policy can induce regional agglomeration of skilled workers. We also find that the equilibrium features symmetry-breaking if migration costs are relatively low; and that worker mobility tends to amplify pre-existing welfare differences in income and welfare across regions.     

FOREIGN DIRECT INVESTMENT,NON‐TRADED GOODS AND REAL WAGES

Using a three‐sector general equilibrium model with non‐traded goods, we investigate the impact of foreign direct investment on the real wages of skilled and unskilled workers. We show that foreign direct investment increases the real wages of skilled and unskilled workers alike, but widens the gap between the two under plausible conditions.     

PRODUCE OR SPECULATE? ASSET BUBBLES,OCCUPATIONAL CHOICE,AND EFFICIENCY*

We study the effects of rational asset bubbles in an overlapping‐generations economy where asset trading requires specialized intermediaries and agents freely choose between working in the production or the financial sector. Frictions in the market for deposits create rents in the financial sector that affect agents’ occupational choices. When rents are large, the private gains associated with trading bubbles lead too many agents to become speculators, causing bubbles to lose their efficiency properties. Moreover, if speculation can be carried out by skilled labor only, then bubbles displace skilled workers away from the productive sector and raise income inequalities.     

A SEARCH‐EQUILIBRIUM APPROACH TO THE EFFECTS OF IMMIGRATION ON LABOR MARKET OUTCOMES

We analyze the impact of the U.S. skill‐biased immigration influx that took place between 2000 and 2009 within a search and matching model that allows for skill heterogeneity, differential search cost, and capital‐skill complementarity. We find that although the skill‐biased immigration raised the overall net income to natives, it had distributional effects. Specifically, unskilled native workers gained in terms of both employment and wages. Skilled native workers, however, gained in terms of employment but lost in terms of wages. Nevertheless, in an extension where skilled natives and immigrants are imperfect substitutes, even the skilled wage rises.     

Immigration Policy,Self‐selection,and the Quality of Immigrants*

This paper investigates the effects of immigration quotas on the average quality of immigrants by developing a human capital migration model where efficiency in migration depends on skills and emigration rates are higher among skilled workers. Studying the joint determination of the domestic level of wages and immigrants' self‐selection, we find a negative relationship between the wage level and the percentage of educated workers among immigrants, which results in a nonstandard downward‐sloping labor supply. In our framework, a higher quota increases the skill mix of immigrants through its negative effect on wages and raises aggregate national income.     

Brain Drain,Fiscal Competition,and Public Education Expenditure

A two‐country model is developed in this paper to examine the implications of fiscal competition in public education expenditure under international mobility of high‐skilled labor. The authors allow for educational choice, asymmetry of countries with respect to total factor productivity, and tax base effects of migration in source and host country. As the latter may give rise to multiplicity of equilibrium, alternative belief structures of mobile high‐skilled workers are carefully taken into account. The paper also looks at the consequences of bilateral policy coordination. While in line with other studies on tax competition, bilateral coordination can reduce the under‐investment problem in public education spending, it also tends to hinder migration or may even reverse the direction of the migration flow that materializes under non‐cooperative policy setting. As a result of its potentially adverse effects on migration patterns, bilateral coordination may therefore reduce global welfare and bring the world economy further away from the social planner's solution.     

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.     

Globalization,Skill Accumulation and the Skill Premium

We analyze the impact of globalization upon the skill premium (inequality) in advanced countries from a two‐goods North–South model with skill accumulation. Globalization consists of an increase in the size of the South. Its impact on inequality depends on its intensity and on the pre‐globalization proportion of skilled workers. The post‐globalization inequality is a non‐monotonic function of the pre‐globalization proportion of skilled workers and of the globalization intensity. The impact is different for the generation in work and for the following generations. There is a threshold value of the skill endowment under (above) which inequality is lower (higher) after than before globalization.     

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     

Cheap home goods and persistent inequality

There exists a large literature which shows that public education is favorable for growth because it increases the level of human capital and at the same time it tends to produce a more even income distribution. More egalitarian societies are also associated with less social conflicts, and individuals have a lower tendency to report themselves happy when inequality is high. Therefore, it is important to study the reasons why the elite opposes the development of a strong public education system. It might be that education is related to social status and a strong public education system might threaten the elite’s political power. We show that one aspect of social status is the specialization of skilled workers in high-paid jobs and the abundance of unskilled workers in the production of cheap “home goods” in the market, such as painting and cleaning a house, babysitting, and/or cooking. We emphasize the role of general equilibrium price adjustments to show that depending on the level of inequality, the elite might prefer an economy with a positive and “high” cost of education than an economy where skills are freely provided. We show that this result goes through even if the skilled wage is not directly affected by the ratio of skilled to unskilled workers. We also provide empirical evidence consistent with our theory.     

The welfare impact of migration with endogenous cross-border movement: An application to the European Union

In this paper, I examine the welfare impact of migration in a general equilibrium model with endogenous worker location choice. My framework incorporates labor productivity differences across countries, worker heterogeneity in productivity across skill and nativity types, as well as country-pair specific costs of migration. In a series of experiments, I predict the migration response of workers to an expansion or contraction in the number of European Union (EU) member countries. For the case of the United Kingdom (U.K.) leaving the EU, commonly referred to as Brexit, low skilled native-born U.K. workers suffer a drop-in income, whereas high skilled workers experience an increase. This result is driven, in part, by an increase in high skilled immigration to the U.K. from outside the EU, which helps to dampen the loss in income of low skilled workers.