On the dynamics of convergence in cross-country incomes

Abstract

The study is motivated by the observation that a striking convergence of real wages has taken place, among many countries now in the OECD. What drives this phenomenal convergence, and is the experience unique in recorded economic history? In order to quantify the process, we explore a novel representation for the dynamics in evolving wage distributions and hypothesize that the growth distribution of wages can be generated by a single stochastic process in which the logarithm of the quantity in question follows a Brownian motion. A linear stochastic model driven by white Gaussian noise is presented, to describe the dynamics of the cross-country distribution of real wages. The model is mechanical and descriptive in nature. It provides a useful way to summarize wage distribution dynamics in a way that is usable for models that focus on underlying microbehavior of labor markets. An empirical application to the evolution of the distribution of real wages across global labor markets going back to the 19th century validates the proposed model and suggests that diffusion may be a preferable technique for the analysis of dynamics in labor markets.