Abstract
In the 1980s and 1990s, the US labour market experiences a remarkable polarization along with fast technological catch-up, as Europe and Japan improve their global innovation performance. Is foreign technological convergence an important source of wage polarization? To answer this question, we build a multi-country Schumpeterian growth model with heterogeneous workers, endogenous skill formation and occupational choice. We show that convergence produces polarization through business stealing and increasing competition in global innovation races. Quantitative analysis shows that these channels can be important sources of US polarization. Moreover, the model delivers predictions on the US wealth-income ratio consistent with empirical evidence.
Highlights
The US labour market has experienced a radical polarization of employment and wages in the last decades
These results suggest that globalization, in the form of fiercer foreign technological competition, can be an important source of wage polarization
Technological catch-up with the US has been a salient feature of the post-WWII global economy
Summary
The US labour market has experienced a radical polarization of employment and wages in the last decades. In an extended version of the model, we allow for a more general technology where skilled and unskilled workers are employed in production and innovation with different factor intensities, we introduce iceberg trade costs, and we specify the workers’ ability distribution We calibrate this generalized model and use it to explore the link between the technology gap, labour market polarization and the wealth-income ratio quantitatively. The increase in the demand and wages of service sector workers relative to other unskilled tasks comes from a general equilibrium market mechanism: foreign competition raises inequality at the top of the distribution, thereby inducing skilled workers to demand more personal services and devote more time to their highly paid jobs. Our paper contributes to this line of research studying the effects of foreign catching up on the structure of wages, employment, and on the evolution of the wealth to income ratio.[2]
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