an analytical framework of government role in technological promotion as a cause of inequality

An Analytical Framework of

Government Role in Technological

Promotion as a Cause of

Inequality

IINTRODUCTIONNTRODUCTION

““For the poor shall never cease For the poor shall never cease out of the land”out of the land”

(Deuteronomy 15:11)(Deuteronomy 15:11)

Thailand is one of the most rapid growth Thailand is one of the most rapid growth country for the last several decades, country for the last several decades, whilst inequality has increased.whilst inequality has increased.


increasing of inequality in the labor-increasing of inequality in the labor-abundant countries does not align with abundant countries does not align with prediction in Stolper-Samuelson prediction in Stolper-Samuelson Theorem Theorem

International trade liberalization and International trade liberalization and technological change are generally technological change are generally accepted as the mutual cause of accepted as the mutual cause of inequality.inequality.


It is obviously seen that technological It is obviously seen that technological improvement grows faster and faster, improvement grows faster and faster, moreover, growth direction is asymmetry moreover, growth direction is asymmetry

developed VS developing countries.developed VS developing countries. ““skilled labor biased technical change”skilled labor biased technical change”

In some developing countries, especially In some developing countries, especially for Thailand, the government plays the for Thailand, the government plays the greater role in R&D than private sector greater role in R&D than private sector

IINTRODUCTIONNTRODUCTIONTable 1 R&D expenditure, percentage of Table 1 R&D expenditure, percentage of

overall domestic’s R&D expenditureoverall domestic’s R&D expenditure

Country Governmentsector

Industrialsector

Educationsector

China 25% 63% 12%

Malaysia 25% 58% 17%

Korea 15% 74% 11%

USA. 11% 73% 12%

Thailand 46% 35% 18%


Limited role of developed countries’ Limited role of developed countries’ government in R&D sector may be result government in R&D sector may be result in negligence in roles of government in in negligence in roles of government in technology promotion for economists.technology promotion for economists.

Therefore, this study will focuses on Therefore, this study will focuses on roles of government as technology roles of government as technology promoter in the model. promoter in the model.


This study focuses on 3 factors:This study focuses on 3 factors: the government who plays a role as the government who plays a role as

technology promoter technology promoter The increase in skilled laborsThe increase in skilled labors relative world prices relative world prices


Objectives of studyObjectives of study

1) To construct the model including the 1) To construct the model including the role of government in technology role of government in technology promoting in the context of open trade promoting in the context of open trade economyeconomy

2) 2) To explain the impact of changes in To explain the impact of changes in relative world price and labors force on relative world price and labors force on the inequality through the channel of the inequality through the channel of government’s technological promotiongovernment’s technological promotion

THE MODELTHE MODEL

The setupThe setup The production sideThe production side Consumer side Consumer side GDP , DNI and pDNI of EconomyGDP , DNI and pDNI of Economy Central planner’s problem Central planner’s problem

The set upThe set up

One small and free trade economy One small and free trade economy The economy last only two period, The economy last only two period, There are 2 goods, X and Y with the price There are 2 goods, X and Y with the price

and and There are 2 factor; skilled labors, H, and There are 2 factor; skilled labors, H, and

unskilled labors, L, whose wages at rateunskilled labors, L, whose wages at rate

and and

1,2t

,WX tP ,

WY tP

,L tw ,H tw


Fix amount of skilled labors and unskilled, Fix amount of skilled labors and unskilled, and and

All goods and factors market are perfectly All goods and factors market are perfectly competitive. competitive.

StH

StL


production function of X and Yproduction function of X and Y

1 1 1

, , , ,1Pt X L t X t X H t X tX A L A H

1 1 1

, , , ,1Pt Y L t Y t Y H t Y tY A L A H


WhereWhere and are efficiency of and are efficiency of

unskilled labors and skilled labors. unskilled labors and skilled labors. is a distribution parameter which is a distribution parameter which

determines how important the two factor determines how important the two factor are. Given implies that are. Given implies that unskilled labors intensive relative to Y. unskilled labors intensive relative to Y.

is the elasticity of substitution is the elasticity of substitution between two factors between two factors

, 0L tA , 0H tA

i

0 1Y X

0,


Note that we superscript P to specify Note that we superscript P to specify equation (3.1) and (3.2) as The amount of X equation (3.1) and (3.2) as The amount of X and Y produced in economy. and Y produced in economy.

and are not necessary to equal to the and are not necessary to equal to the amount of X and Y consumed in economy, amount of X and Y consumed in economy, and .and .

PtX

PtY

CtX

CtY


The central planner collects ad-varolem tax at rate The central planner collects ad-varolem tax at rate equally on every labor’s income in the first equally on every labor’s income in the first period. period.

In the first period, the revenue are distributed into In the first period, the revenue are distributed into and for promoting efficiency of unskilled and for promoting efficiency of unskilled labors and skilled labors in second periodlabors and skilled labors in second period

In the second period, Central planner will do In the second period, Central planner will do nothing. nothing.

LG HG

The set upThe set up The objective of central planner is to The objective of central planner is to

maximize summation of per capita maximize summation of per capita Disposable National Income (pDNI) of two Disposable National Income (pDNI) of two periods .periods .


Growth efficiency of labors can be Growth efficiency of labors can be explained by the equations as followexplained by the equations as follow

Where and are coefficient of where Where and are coefficient of where

,2 ,1L L L LA A G

,2 ,1 ; 0 1H H H HA A G

L HjG

,j L H

The production sideThe production side

Equilibrium ConditionsEquilibrium Conditions There are 2 groups of equilibrium There are 2 groups of equilibrium

conditions.conditions. Firstly, Zero-profit conditions, Firstly, Zero-profit conditions,

, , , ,,WX t X t L t H tP MC w w

, , , ,,WY t Y t L t H tP MC w w


Equilibrium ConditionsEquilibrium Conditions The others conditions are full employment The others conditions are full employment

conditions. conditions.

, , , , , ,

, ,

, ,X t L t H t Y t L t H tS P Pt t t

L t L t

MC w w MC w wL X Y

w w

, , , , , ,

, ,

, ,X t L t H t Y t L t H tS P Pt t t

H t H t

MC w w MC w wH X Y

w w


Equilibrium ConditionsEquilibrium Conditions Since there are 4 equilibrium conditions Since there are 4 equilibrium conditions

(equations) and 4 endogeneous variables, (equations) and 4 endogeneous variables, , ,we can solve for , ,we can solve for

, ,, , ,P PL t H t t tw w X Y

, ,, , ,P PL t H t t tw w X Y


Equilibrium wages and outputsEquilibrium wages and outputs After minimizing cost, the cost functions of After minimizing cost, the cost functions of

X and Y areX and Y are

1

1 1 6 1 1 6 1, , , , , , ,, , 1P P

X t L t H t t t X L t L t X H t H tC w w X X A w A w

1

1 1 6 1 1 6 1, , , , , , ,, , 1P PY t L t H t t t Y L t L t Y H t H tC w w Y Y A w A w

The production sideThe production sideEquilibrium wages and outputsEquilibrium wages and outputs After deriving the marginal cost functions and After deriving the marginal cost functions and

then solving the zero profit conditions, skilled then solving the zero profit conditions, skilled and unskilles labors wages are,and unskilles labors wages are,

11 1 1

, ,

, ,1 1

W WX Y t Y X t

H t H t

X Y X Y

P Pw A

11 1 1

, ,

, ,

1 1

1 1

W WY X t X Y t

L t L t

X Y X Y

P Pw A


Equilibrium wages and outputsEquilibrium wages and outputs Due to taxation, wages in the first period Due to taxation, wages in the first period

must be separate into 2 types: must be separate into 2 types: the market the market wageswages and and the disposable wagesthe disposable wages. .


Equilibrium wages and outputsEquilibrium wages and outputs the market wagesthe market wages are the wages are the wages

producer pay for laborsproducer pay for labors the disposable wagesthe disposable wages are the wages are the wages

labors actually receive after tax labors actually receive after tax


Equilibrium wages and outputsEquilibrium wages and outputs Since elasticity of supply for labors are Since elasticity of supply for labors are

zero (due to and are fix amount), labors zero (due to and are fix amount), labors will bare the full burden of tax. will bare the full burden of tax.

We can re-specify market wages and We can re-specify market wages and disposable wages as follows.disposable wages as follows.

The production sideThe production sideEquilibrium wages and outputsEquilibrium wages and outputs

,1 ,11D MH Hw w

11 1 1

,1 ,1

,1 ,11 1

W WX Y Y XM

H H

X Y X Y

P Pw A

11 1 1

,1 ,1

,1 ,1

1 1

1 1

W WY X X YM

L L

X Y X Y

P Pw A

,1 ,11D ML Lw w


Equilibrium wages and outputsEquilibrium wages and outputs

11 1 1

,2 ,2

,2 ,21 1

W WX Y Y X

H H

X Y X Y

P Pw A

11 1 1

,2 ,2

,2 ,2

1 1

1 1

W WY X X Y

L L

X Y X Y

P Pw A


Equilibrium wages and outputsEquilibrium wages and outputs Rate of market wages and wages before Rate of market wages and wages before

taxation are the same because employers do taxation are the same because employers do not bare the tax burden at all. not bare the tax burden at all.

Note that disposable wages and the wages in Note that disposable wages and the wages in the second period are not equilibrium wages the second period are not equilibrium wages yet until equilibrium central planner’s tax rate yet until equilibrium central planner’s tax rate and expenditure are already solved. and expenditure are already solved.

The production sideThe production sideEquilibrium wages and outputsEquilibrium wages and outputs After solving the full-employment conditions, the equilibrium After solving the full-employment conditions, the equilibrium

outputs areoutputs are

1 6 1 6, , , ,1

1 1

S SY L t L t t Y H t H t tP W

t X

X Y X Y

A w L A w HX p

1 6 1 6, , , ,1

1 1

S SX H t H t t X L t L t tP W

t Y

X Y X Y

A w H A w LY p


Equilibrium wages and outputsEquilibrium wages and outputs This implies that the equilibrium This implies that the equilibrium

outputs are not affected by tax due to outputs are not affected by tax due to insensitivity of the market wages to tax.insensitivity of the market wages to tax.

Consumer sideConsumer side

We set consumer’s utility maximization We set consumer’s utility maximization problem as follows, problem as follows,

2 21

, 1 1

,1 1 ,1 1 ,1 1 ,1 1

,2 2 ,2 2 ,2 2 ,2 2

,0 1

. .

C Ct t

t C Ct t t

X Y t t

W C W C D S D SX Y L H

W C W C S SX Y L H

Max U X Y

S T P X P Y w L w H

P X P Y w L w H

Consumer sideConsumer side The equilibrium consumption in the first The equilibrium consumption in the first

period areperiod are

,2 2 ,2 22

,22

S SL HC

WX

w L w HX

P

,2 2 ,2 22

,22

S SL HC

WY

w L w HY

P

Consumer sideConsumer side And the equilibrium consumption in the And the equilibrium consumption in the

second period aresecond period are

,1 1 ,1 1 ,1 1 ,1 11

,1 ,1

12 2

D S D S M S M SL H L HC

W WX X

w L w H w L w HX

P P

,1 1 ,1 1 ,1 1 ,1 11

,1 ,1

12 2

D S D S M S M SL H L HC

W WY Y

w L w H w L w HY

P P

GDP , DNI and pDNI of GDP , DNI and pDNI of EconomyEconomy

There are 3 approach for calculating Gross Domestic There are 3 approach for calculating Gross Domestic Product (GDP) Product (GDP)

output approachoutput approach expenditure approachexpenditure approach income approachincome approach


O W P W Pt X t Y tGDP p X p Y

2 ,2 2 2 2E W C W C

XGDP p X p Y

1 ,1 1 ,1 1E W C W C

X Y L HGDP p X p Y G G

2 ,2 2 ,2 2I S S

L HGDP w L w H

1 ,1 1 ,1 1I M S M S

L HGDP w L w H


This study have proved thatThis study have proved that

(3.70)(3.70)

This implies that central planner’s taxation (or This implies that central planner’s taxation (or expenditure) dose not affect GDP in the first expenditure) dose not affect GDP in the first period because the value of is not period because the value of is not affected by tax.affected by tax.

On the contrary, central planner’s action affect On the contrary, central planner’s action affect economy’s GDP at the second period due to economy’s GDP at the second period due to increasing of andincreasing of and

O E It t t tGDP GDP GDP GDP

1OGDP

,2HA ,2LA


Disposable National Income (DNI) is the Disposable National Income (DNI) is the income that labors can actually spend for income that labors can actually spend for purchasingpurchasing

National Income (pDNI) is average DNI per National Income (pDNI) is average DNI per one labor in economy.one labor in economy.

t tDNI GDP total tax

tt S S

t t

DNIpDNI

L H

Central planner’s Central planner’s problemproblem

The central planner’s problem is set up as The central planner’s problem is set up as follows.follows.

21

, ,1

,1 1 ,1 1

; 0 1

. . , 0 1

L H

tG G

G Gt

M S M SL H L H

Max pDNI

S T w L w H G G


The equilibrium expenditure areThe equilibrium expenditure are

11 1

1 1 1

2 1 1 ,2 ,2

,12 2

1 1

1 1

S S S W WY X X Y

L L L S S

X Y X Y

L L H P PG A

L H

11 1

1 1 1

2 1 1 ,2 ,2

,12 2 1 1

S S S W WX Y Y X

H H H S S

X Y X Y

H L H P PG A

L H


the equilibrium tax rate isthe equilibrium tax rate is

1

11 1

2 2 ,1 1 ,1 1

11 1 1

1 1 1 11 1

,2 ,2 ,2 ,2

,1 2 ,1 2

1

1 1

1 1 1 1

S S

G S S M S M SL H

W W W WY X X Y X Y Y XS S

L L H H

X Y X Y X Y X Y

L H

L H w L w H

P P P PA L A H

Defining termsDefining terms In this study, Inequality refers to relative In this study, Inequality refers to relative

wagewage

There is perfect equality whenThere is perfect equality when

11 1 1

, ,, ,1 1

, , , ,1 1

W WX Y t Y X tH t H t

W WL t L t Y X t X Y t

P Pw A

w A P P

,

,

1H t

L t

w

w

Defining termsDefining terms

Given initial relative wage is more than Given initial relative wage is more than one, one,

the inequality rises when the relative the inequality rises when the relative wage increases wage increases

the inequality falls when the relative the inequality falls when the relative wage increasewage increase

The interpretation is opposite when initial The interpretation is opposite when initial relative wage is less than one. relative wage is less than one.


““expenditure ratio” is the skilled to expenditure ratio” is the skilled to unskilled ratio of expenditure on promoting unskilled ratio of expenditure on promoting their efficiencytheir efficiency

11 1

1 1 1

,2 ,2,1 21 1

,1 2 ,2 ,21 1

W WSX Y Y XHH H

S W WL L L Y X X Y

P PAG H

G A L P P


The “efficiency ratio” is the skilled to The “efficiency ratio” is the skilled to unskilled ratio of labor efficiencyunskilled ratio of labor efficiency

,2 ,1

,2 ,1

H H H H

L L L L

A A G

A A G

The growth patterns of labor force are The growth patterns of labor force are stylized as follows.stylized as follows.

We define We define , therefore , therefore

is called labor growth ratio. is called labor growth ratio.


2 1n

S St t tH L

2 1S S

LL n L 2 1S S

HH n H

n

Defining terms Defining terms

In this study, the term “endowment” refers In this study, the term “endowment” refers to exogeneous variable, except for relative to exogeneous variable, except for relative world price, in the first period.world price, in the first period.

Central planner’s expenditure Central planner’s expenditure and dynamic Inequalityand dynamic Inequality

Though all exogeneous variables do not Though all exogeneous variables do not change, central planner still plays an important change, central planner still plays an important role in changing relative wage by himself.role in changing relative wage by himself.

Given every other exogeneous vaariables Given every other exogeneous vaariables unchanged throughout two periods, relative unchanged throughout two periods, relative wage in both periods are the same if efficiency wage in both periods are the same if efficiency ratio in the second period is equal to efficiency ratio in the second period is equal to efficiency ratio endowment. ratio endowment.


is called the critical value of the labor is called the critical value of the labor proportion which makes the efficiency proportion which makes the efficiency ratio in the second period equal to itsratio in the second period equal to its

endowment endowment ,1 ,2

,1 ,2

H H

L L

A A

A A

*


We can conclude that.We can conclude that.

ifif

ifif

ifif,2 ,1

,2 ,1

DH H

DL L

w w

w w

,2 ,1

,2 ,1

DH H

DL L

w w

w w

,2 ,1

,2 ,1

DH H

DL L

w w

w w

*2

*2

*2

Central planner’s Central planner’s expenditure and dynamic expenditure and dynamic

InequalityInequality To maximize total pDNI of economy, To maximize total pDNI of economy,

central planner tends to expend more on central planner tends to expend more on promoting efficiency of the larger group in promoting efficiency of the larger group in the second period rather than the smaller the second period rather than the smaller groupgroup

because the expenditure will more because the expenditure will more effectively increase pDNI in the second effectively increase pDNI in the second period. period.

Central planner’s Central planner’s expenditure and dynamic expenditure and dynamic

InequalityInequality increasing in the expenditure ratio leads increasing in the expenditure ratio leads

to increasing in the efficiency ratio, in the to increasing in the efficiency ratio, in the other word, skilled biased technology other word, skilled biased technology progress.progress.

increasing in the efficiency ratio results in increasing in the efficiency ratio results in increasing in inequality. increasing in inequality.

Remind that Remind that the elasticity is defined as followthe elasticity is defined as follow

where is where is labor proportion elasticity of labor proportion elasticity of relative wage in the relative wage in the period period

A change in the labor proportion A change in the labor proportion

and dynamic inequalityand dynamic inequality

tht

S St t tH L

, ,

,, ,

H t L t tt

t H t L t

w w

w w

,t

A change in the labor proportion A change in the labor proportion and dynamic inequalityand dynamic inequality

For the first period,For the first period, This implies that relative disposable wage is This implies that relative disposable wage is

not affected by a small change in labor not affected by a small change in labor proportion. proportion.

This result aligns with the prediction in Factor This result aligns with the prediction in Factor Price Insensitivity Lemma (Feenstra, 2003).Price Insensitivity Lemma (Feenstra, 2003).

,1 0


For the second period, the derivative of the For the second period, the derivative of the relative wage with respective the labor relative wage with respective the labor proportion in the second period is proportion in the second period is

And, And,

,2 ,2 ,2 ,2 ,2 ,2

2 2,2 ,2

H L H L H L H L

H LH L

d w w w w A A G G

d G GA A

,2 1


Since ,Since , .. Unlike the first period, In the second period, a Unlike the first period, In the second period, a

small increase (decrease) of labor proportion small increase (decrease) of labor proportion leads to an increase (decrease) of relative leads to an increase (decrease) of relative wage.wage.

0 1 ,2 0


Comparing to the case of unchanged labor Comparing to the case of unchanged labor proportion, if the labor proportion in the proportion, if the labor proportion in the second period increases, central planner will second period increases, central planner will expect that change and sacrifice more budget expect that change and sacrifice more budget for promoting efficiency of skilled labors.for promoting efficiency of skilled labors.


Therefore technology is biased to skilled Therefore technology is biased to skilled labors in the second period, i.e. the efficiency labors in the second period, i.e. the efficiency ratio increases. Increasing of the efficiency ratio increases. Increasing of the efficiency ratio leads to increasing of the relative wage in ratio leads to increasing of the relative wage in the second, comparing to the case of the second, comparing to the case of unchanged labor proportion. unchanged labor proportion.


After integrating all implication in both previous and After integrating all implication in both previous and this section, the dynamic inequality under changing this section, the dynamic inequality under changing of the labor proportion can be conclusion as follows.of the labor proportion can be conclusion as follows.

When labor proportion increase (decrease) from in When labor proportion increase (decrease) from in the first period to in the second period,the first period to in the second period,

(1)(1) if the labor proportion in the first period is more (less) if the labor proportion in the first period is more (less) than the critical value, inequality in the second than the critical value, inequality in the second period will increase (decrease) from the first period period will increase (decrease) from the first period more extremely than the case of unchanged labor more extremely than the case of unchanged labor proportion proportion

1

2


(2) if the labor proportion in the first period less (2) if the labor proportion in the first period less (more) than the critical value(more) than the critical value

(2.1) if the labor proportion in the second period is still less (2.1) if the labor proportion in the second period is still less (more) than the critical value, inequality in the second (more) than the critical value, inequality in the second period will still decrease (increase) from the first period but period will still decrease (increase) from the first period but decreasing (increasing) will be less extreme than the case decreasing (increasing) will be less extreme than the case of unchanged labor proportion of unchanged labor proportion

(2.2) if the labor proportion in the second period is more (than) (2.2) if the labor proportion in the second period is more (than) than the critical value, inequality in the second period will than the critical value, inequality in the second period will increase (decrease) from the first period increase (decrease) from the first period

A change in the relative world A change in the relative world

price and dynamic inequalityprice and dynamic inequality the elasticity is defined asthe elasticity is defined as

where where is relative world price elasticity is relative world price elasticity of relative wage in the period, .of relative wage in the period, .

tht,P t

, , , ,,

, ,, ,

W WH t L t X t Y t

P t W WH t L tX t Y t

w w P P

w wP P

A change in the relative world A change in the relative world price and dynamic inequalityprice and dynamic inequality

For the first period,For the first period,

This study has already proved thatThis study has already proved that

1

,1

,1

,1 1 1

,1 ,1

,1 ,1

1 1

0

1 1

WX

X Y X Y WY

PW WX X

X Y Y XW WY Y

P

P

P P

P P

,1 1P


We can conclude that, in the first period, the We can conclude that, in the first period, the relative wage increases (decreases) more relative wage increases (decreases) more rapidly than small decreasing (increasing) of rapidly than small decreasing (increasing) of the relative world prices.the relative world prices.

This conclusion is identical to the prediction in This conclusion is identical to the prediction in Stolper-Samuelson theorem.Stolper-Samuelson theorem.

economy produces more goods X and less economy produces more goods X and less goods Y when relative world price increases.goods Y when relative world price increases.


Since goods X is unskilled labor intensive Since goods X is unskilled labor intensive while goods Y is skilled labor intensive, while goods Y is skilled labor intensive, producers need more unskilled labors but less producers need more unskilled labors but less skilled labors.skilled labors.

Then real skilled labor wages decreases, but Then real skilled labor wages decreases, but real unskilled labor wages increases real unskilled labor wages increases

The relative wage in the first period decrease The relative wage in the first period decrease in consequence. in consequence.


For the second period, the derivative of the For the second period, the derivative of the relative wage with respective the relative relative wage with respective the relative world price in the second period is world price in the second period is

11 1

,21

,2 ,2 ,2 ,11

,1,2 ,2 ,2 ,2,2

,2

,2 ,2

,2 ,2

1 1

WX

X Y WH L H LY H H HW W W WW

L L LX Y X YXY XW

Y

H L

W WX Y

P

d w w G GP A G

A Gd P P P PP

P

w w

P P


Therefore,Therefore,

Since Since , we can conclude that , we can conclude that

1

,2

,2

,2 1 1

,2 ,2

,2 ,2

1 11

11 1

WX

X Y X Y WY

PW WX X

Y X X YW WY Y

P

P

P P

P P

0 1

,2 ,1 1P P


This means that, if the relative world price This means that, if the relative world price increases (decreases) by the same small increases (decreases) by the same small percentage, the relative wage in the second percentage, the relative wage in the second period will decreases (increases) more rapidly period will decreases (increases) more rapidly than the relative wage in the first period. than the relative wage in the first period.


For explanation, when the technology level is For explanation, when the technology level is fixed, mechanism of impact on the relative fixed, mechanism of impact on the relative wage can be explained by the mechanism in wage can be explained by the mechanism in Stolper-Samuelson theorem.Stolper-Samuelson theorem.

But, in the second period when there is But, in the second period when there is technology progress, Stolper-Samuelson’s technology progress, Stolper-Samuelson’s mechanism is reinforced through skilled-mechanism is reinforced through skilled-biased technological progress. biased technological progress.


Increasing of relative world price could be Increasing of relative world price could be previously expected by central planner in the previously expected by central planner in the first period.first period.

To increase output of X for maximizing pDNI, To increase output of X for maximizing pDNI, central planner expended more for promoting central planner expended more for promoting efficiency of unskilled labors relative to skilled efficiency of unskilled labors relative to skilled labors in the past and, in present period, labors in the past and, in present period, technology is biased to unskilled labors in technology is biased to unskilled labors in consequence. consequence.


Unskilled biased technology results in Unskilled biased technology results in decreasing in the relative wage.decreasing in the relative wage.

Since impact from Stolper-Samuelson’s Since impact from Stolper-Samuelson’s mechanism and impact skilled biased mechanism and impact skilled biased technological progress have the same technological progress have the same direction, the relative world price affects direction, the relative world price affects relative wage in the second period more relative wage in the second period more extremely than the first period. extremely than the first period.


After integrating all of conclusion from this and After integrating all of conclusion from this and previous sections, the dynamic inequality under previous sections, the dynamic inequality under changing of the relative world price can be changing of the relative world price can be conclusion as follows.conclusion as follows.

(1)(1) When the relative world price in the first period When the relative world price in the first period slightly decreases (increases), inequality the first slightly decreases (increases), inequality the first period increases (decreases) but inequality in the period increases (decreases) but inequality in the second period is the same as the case of unchanged second period is the same as the case of unchanged relative world price.relative world price.


(2)(2) When the relative world price in the second period When the relative world price in the second period slightly decreases (increases),slightly decreases (increases),

(2.1) if the labor proportion in the second period is more (less) (2.1) if the labor proportion in the second period is more (less) than the critical value, inequality in the second period will than the critical value, inequality in the second period will increase (decrease) from the first period more extremely than increase (decrease) from the first period more extremely than the case of unchanged relative world price.the case of unchanged relative world price.

(2.2) if the labor proportion in the second period is less (more) (2.2) if the labor proportion in the second period is less (more) than the critical value, inequality in the second period will still than the critical value, inequality in the second period will still decrease (increase) from the first period but decreasing decrease (increase) from the first period but decreasing (increasing) will be less extreme than the case of unchanged (increasing) will be less extreme than the case of unchanged relative world price.relative world price.

Implication of changing Implication of changing in inequality in inequality

Implication 1Implication 1

Without government as technology Without government as technology promoter, inequality arises from promoter, inequality arises from

skilled biased technological change, i.e. skilled biased technological change, i.e. increasing of efficiency ratio increasing of efficiency ratio

increasing (decreasing) of price of goods increasing (decreasing) of price of goods which is skilled(unskilled)-labor intensive. which is skilled(unskilled)-labor intensive.

Implication of changing Implication of changing in inequalityin inequality

Implication 2 Implication 2 Given amount of labors and world prices being Given amount of labors and world prices being equal throughout two periods, under actions of equal throughout two periods, under actions of national income maximizing government as national income maximizing government as technology promoter , technology promoter ,

government is “inequality creator” if government is “inequality creator” if unskilled labors is minority group unskilled labors is minority group

government is “inequality reducer” if government is “inequality reducer” if skilled labors is minority group.skilled labors is minority group.



Under actions of national income maximizing Under actions of national income maximizing government as technology promoter, government as technology promoter,

any external factors which increases any external factors which increases (decreases) unskilled (skilled) labors (decreases) unskilled (skilled) labors in the second period can decrease in the second period can decrease inequality.inequality.


For example, assume that all immigrants For example, assume that all immigrants are accepted as citizen by local are accepted as citizen by local government. Immigrant permission policy government. Immigrant permission policy in the long-run will reduce inequality in in the long-run will reduce inequality in the second period if there most of the second period if there most of immigrants are unskilled labors. immigrants are unskilled labors.



Under actions of national income maximizing Under actions of national income maximizing government as technology promoter, government as technology promoter,

any external shocks through swing in any external shocks through swing in relative price leads to more extreme relative price leads to more extreme fluctuation of local relative wage, fluctuation of local relative wage, comparing to the case of without comparing to the case of without government as technology promoter.government as technology promoter.



Both Increasing (decreasing) of skilled Both Increasing (decreasing) of skilled (unskilled) labors and increasing (unskilled) labors and increasing (decreasing) of price of goods which is (decreasing) of price of goods which is skilled(unskilled)-labor intensive in the skilled(unskilled)-labor intensive in the second period will retard government’s second period will retard government’s inequality reduction but reinforce inequality reduction but reinforce government’s inequality creation.government’s inequality creation.


ImplicationImplication 6 6Under actions of national income maximizing Under actions of national income maximizing government as technology promoter, government as technology promoter,

any government policies which decrease any government policies which decrease (increase) of price of goods which is (increase) of price of goods which is skilled(unskilled)-labor intensive will reduce skilled(unskilled)-labor intensive will reduce inequalityinequality

any government policies which increase any government policies which increase (decrease) of price of goods which is (decrease) of price of goods which is skilled(unskilled)-labor intensive will create skilled(unskilled)-labor intensive will create inequality. inequality.


For exampleFor example For imported goods, if government decreases For imported goods, if government decreases

(increases) tariff rate on skilled(unskilled)-labor (increases) tariff rate on skilled(unskilled)-labor intensive goods, inequality will be reduce. If intensive goods, inequality will be reduce. If government acts oppositely, inequality will be government acts oppositely, inequality will be created.created.

if government decreases (increases) commercial if government decreases (increases) commercial tax rate on skilled(unskilled)-labor intensive goods, tax rate on skilled(unskilled)-labor intensive goods, inequality will be reduce. If government acts inequality will be reduce. If government acts oppositely, inequality will be created.oppositely, inequality will be created.

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of of

presentationpresentation

an analytical framework of government role in technological promotion as a cause of inequality

Documents

cause of inequality

private sector slide

labors income

factor skilled labors

role of government

labors force

efficiency of unskilled

roles of government