CFCM 14/13: Globalization, Wage Polarization, and the Unstable Great Ratio

Summary

The US labour market has experienced a remarkable polarization in the 1980s and 1990s. Moreover, recent empirical work has documented a sharp increase in the wealth to income ratio in that period. Contemporary to these inequality trends, the US faced a fast technological catch-up as European countries and especially Japan drastically improved their global innovation and patenting activity. Is foreign technological convergence an important source of the recent evolution of the US wage and employment structure? Can it contribute shaping the dynamics of wealth-to-income ratio? To answer these questions, we set up a Schumpeterian model of endogenous technological progress with two asymmetric countries, heterogeneous workers, and endogenous skill formation. 

In this Nottingham School of Economics working paper Cozzi and Impullitti build a Schumpeterian growth model to analyse the links between globalization, in the form of international technology diffusion, and the polarization of wages across different workers and occupations. In the model, workers of different innate abilities face first an education and then an occupational choice. High ability people acquire education and become skilled, those with intermediate abilities work as unskilled workers in production jobs, and those at the bottom of the ability distribution work in service occupations. Service workers provide personal services allowing their employers to save working time. In equilibrium, only skilled workers buy personal services. Fiercer foreign competition triggered by technological catching up shifts production jobs abroad and forces domestic firms to innovate more. Hence, the employment share of production workers shrinks, while the demand for both high skilled and service sector workers rises, thus increasing polarization. Moreover, in the Schumpeterian framework the stock market value of firms is the driver of innovation, globalization triggers more innovation only by increasing firms’ profits and market values. Since corporate wealth, the stock market value of firms, accounts for a large share on national private wealth or capital, our mechanism of globalization-induced innovation has implications for the evolution of the capital-income ratio. Calibrating the model to match key facts of the US economy, we find that foreign technological catching-up observed between the late 1970s and early 1990s reproduces a non-negligible part of US wage polarization and a substantial part of the increase in the wealth-to-income ratio in that period.

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CFCM Discussion Paper 14/13, Globalization, Wage Polarization, and the Unstable Great Ratio by Guido Cozzi and Giammario Impullitti, October 2014

Authors

Guido Cozzi and Giammario Impullitti

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