Capital Intensity, Neutral Technological Change, and Earnings Inequality

Abstract

Using a neoclassical production function with aggregate amounts of labour, skill, and capital, earnings inequality is derived as the product of inequality in skills and inequality multiplier. Evidence from growth accounting supports the capital-intensity hypothesis that capital accumulation increases the inequality multiplier. Neutral technological change then raises the inequality multiplier by inducing capital accumulation. The results provide a theoretical basis for Jan Tinbergen's characterization of the evolution of inequality as a race between technological development and education.