Technological Progress, Skilled-Unskilled Wage Gap, and Welfare: A General Equilibrium Analysis

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ABSTRACT

By constructing a two-sector (high-tech and low-tech) model, this paper examines the effects of technological progress occurred in the high-tech sector on skilled-unskilled wage gap and welfare. In order to introduce the endogenous separation mechanism of skilled and unskilled workers, this paper assumes heterogeneous learning abilities among workers. Some workers who possess low learning abilities suffer larger disutility from the skill training. Since a technological progress of high-tech sector increases the skilled wage, it gives an additional incentive to unskilled workers so as to become skilled. Then, the proportion of skilled workers becomes large, and the high-tech sector also develops - through the increasing returns to scale in the range of varieties of skilled labor.

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INTRODUCTION

Recently, we observe rising inequality in a number of high-income developing countries, where some industries (or regions) have been experienced rapid growth, while some other industries (or regions) have been stagnant. Why does this kind of uneven development occur?

Needless to say, this is not a new economic problem. Nicholas Kaldor takes such an inequality as a 'regional' problem the problem, that is, of different regions growing at uneven rates; with some regions developing relatively fast and others tending to be left behind (Kaldor, 1970, p.337). Kaldor (1970) investigates the regional inequality problem and argues that the principle of 'cumulative causation', called by Myrdal (1957), is the cause of such inequality.

This is nothing else but the existence of increasing returns to scale using that term in the broadest sense in producing activities. These are not just the economies of large-scale production, commonly considered, but the cumulative advantages accruing from the growth of industry itself the development of skill and know-how; the opportunities for easy communication of ideas and experience; the opportunity of ever-increasing differentiation of processes and of specialization in human activities. (Kaldor, 1970, p.340)

The idea of Kaldor (1970) is very plausible; however he does not explicitly present the framework of the model, which can explain his idea. Therefore, this paper constructs a simple model, which is based on the Kaldor's idea; and then we examine how a technological progress affects the skill acquisition of workers. According to the Kaldor's idea, once a sector (or region) gains an advantage over the other sectors, the sector induces people to move to that sector; and then agglomeration economies produce further advantages. This paper focuses on the agglomeration economy caused by the increase in the number of skilled workers, presented by Behrens and Sato (2006).

Behrens and Sato (2006) investigate the role of increasing returns to scale in the range of skilled labor; and its consequences on capital-skill complementarities. The purpose of their study is to show that international capital market integration has the important role in explaining the international skill gap. This paper borrows the basic framework of Behrens and Sato (2006) model, but modifies their model to two-sector closed model in order to examine domestic inequality based on the Kaldor's idea. Behrens and Sato (2006) clearly show the increasing international skill gap in their model; however the domestic skilled-unskilled wage gap is shown to be decrease (resp. increase) in developing countries (resp. developed countries). This result for the developing countries is not consistent with empirical studies, which show rising wage inequalities in developing countries as well as developed countries. Also, Behrens and Sato do not consider welfare analysis. Thus, one contribution of this paper is to demonstrate that how a sector-specific technological progress affects domestic skilled-unskilled inequality and welfare.

The comparative statics presented in this paper focus on how a rise in the total factor productivity (TFP) of a high-tech sector affects on domestic economy. …