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Innovation and Inequality

Innovation and Inequality: How Does Technical Progress Affect Workers?

Gilles Saint-Paul
Copyright Date: 2008
Edition: STU - Student edition
Pages: 208
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  • Book Info
    Innovation and Inequality
    Book Description:

    Karl Marx predicted a world in which technical innovation would increasingly devalue and impoverish workers, but other economists thought the opposite, that it would lead to increased wages and living standards--and the economists were right. Yet in the last three decades, the market economy has been jeopardized by a worrying phenomenon: a rise in wage inequality that has left a substantial portion of the workforce worse off despite the continuing productivity growth enjoyed by the economy.Innovation and Inequalityexamines why.

    Studies have firmly established a link between this worrying trend and technical change, in particular the rise of new information technologies. InInnovation and Inequality, Gilles Saint-Paul provides a synthetic theoretical analysis of the most important mechanisms by which technical progress and innovation affect the distribution of income. He discusses the conditions under which skill-biased technical change may reduce the wages of the least skilled, and how improvements in information technology allow "superstars" to increase the scale of their activity at the expense of less talented workers. He shows how the structure of demand changes as the economy becomes wealthier, in ways that may potentially harm the poorest segments of the workforce and economy. An essential text for graduate students and an indispensable resource for researchers,Innovation and Inequalityreveals how different categories of workers gain or lose from innovation, and how that gain or loss crucially depends on the nature of the innovation.

    eISBN: 978-1-4008-2477-9
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Introduction
    (pp. vii-xvi)

    The effect of technical progress on the welfare of workers has long been a matter of controversy. Historically, one can document famous episodes of violent protests against productivity improvements that workers felt threatened their jobs. InDas Kapital, Marx (1867) documents an episode of revolt against the introduction of machinery, which actually led to innovation being stalled:¹

    In the 17th century nearly all Europe experienced revolts of the workpeople against the ribbon-loom, a machine for weaving ribbons and trimmings, called in Germany Bandmühle, Schnurmühle, and Mühlenstuhl. These machines were invented in Germany. Abbé Lancellotti, in a work that appeared in...

  4. 1 Which Tools Do We Need?
    (pp. 1-22)

    This book is about the effect of technical change on the distribution of income. Most results build on a standard set of tools and models, which are briefly introduced here. The reader familiar with these tools can skip this chapter at no cost; the reader unfamiliar with this material may want to complement it with more detailed treatments in the textbooks by Romer (2000), Blanchard and Fischer (1989), Barro and Sala-i-Martin (2003), Aghion and Howitt (1997), and Bertola et al. (2005).

    At any point in time, people earn part of their income as the return to the factors of production...

  5. 2 Productivity and Wages in Neoclassical Growth Models
    (pp. 23-31)

    The natural starting point for discussing the effect of technical progress on wages is the neoclassical growth model discussed in the previous chapter. We have seen that technical progress can be represented by an increase in total factor productivityA, and that if this quantity grows at a constant rateg, the economy converges to a balanced-growth path, provided that utility is isoelastic and thatAis multiplicative in labor.

    Why do growth theorists traditionally focus on such balanced-growth paths? One reason is that it allows us to have a tractable framework for analytical purposes (we can then talk about...

  6. 3 Heterogeneous Labor
    (pp. 32-41)

    If it is difficult for technology to reduce wages in a world of homogeneous labor, can it reduce the wages ofsomeworkers? To answer this question, we need to extend the neoclassical growth model to take into account heterogeneity among workers.

    A simple way to introduce labor heterogeneity is to assume that there are two types of workers, skilled and unskilled. We denote byHandLthe total supply of skilled and unskilled labor, and assume that these are fixed (we shall relax that assumption in chapter 5 when dealing with supply responses). The production function can now be...

  7. 4 Competing Technologies
    (pp. 42-56)

    In the preceding chapter, we saw how technical progress can shift the production function in such a way that it reduces the marginal productivity of unskilled workers while increasing that of skilled workers. In that framework, the new production function replaces the old one. This chapter considers an alternative route: what if one can continue to use the old technology instead of the new one?

    It may be that the new technology is so productive that the old technology is certain to be abandoned. If this is so, we are back to the analysis of the preceding chapter. This will...

  8. 5 Supply Effects
    (pp. 57-84)

    The rise in inequality that has been observed in the United States and other countries has taken place despite coinciding with a rise in the overall educational standards of the workforce. That is, the return to skill has increased while at the same time the supply of skills has increased. A conventional view (see, for example, Katz and Murphy 1992) is that relative demand shifts induced by technical change have been strong enough to offset these countervailing shifts in relative supply. It is tempting, however, to speculate that improvements in education levels have in factcontributedto the phenomenon of...

  9. 6 Labor as a Quality Input: Skill Aggregation and Sectoral Segregation
    (pp. 85-98)

    The preceding chapters have analyzed how technical progress affects inequality in “neoclassical models.” These models have the following characteristics:

    Workers bring to the firm a vector of characteristics.

    The production function depends on the aggregate vector of characteristics used by the firms and is independent of how they are embodied in its workers. That is, workers interact within the firm in a linear fashion. Their characteristics are added so as to determine the vector of the firm’s inputs.

    The labor market makes individual firms and workers “irrelevant.” A firm can purchase any vector of characteristics it wants, by paying a...

  10. 7 The Economics of Superstars
    (pp. 99-116)

    In the labor market, one observes individuals whose earnings are orders of magnitude larger than any reasonable estimate of their opportunity cost of work. These people include top managers, media stars, and sportsmen. It seems difficult to explain such a phenomenon within the standard neoclassical framework. Furthermore, in many cases (as for the media) these supranormal returns seem to be associated with an information technology which allows these people to spread their talent over a large market. Understanding the superstars phenomenon may thus give some insights into how information technology affects the distribution of income.¹

    Rosen (1981) was the first...

  11. 8 Complementarities and Segregation by Skills
    (pp. 117-151)

    A determinant of the distribution of income which we have ignored so far is the assignment of workers to firms. It is known that firms within the same sector are quite heterogeneous with respect to their skill composition and the wages they pay. Casual intuition suggests that one is more productive if one’s coworkers are also more productive; furthermore, in a number of sectors (for example, academia, sport), the assignment is segregated by skills: good workers team with good workers and bad workers team with bad workers.

    We want to know which kind of technologies lead to such segregation, and...

  12. 9 Demand Effects
    (pp. 152-173)

    In the preceding chapters I have analyzed the many ways in which technical progress may be “skill-biased,” in that its direct effect on the marginal product of different skill categories is not proportional. In this chapter, I analyze how technical progress can affect inequality through its general equilibrium effects on relative prices. That is, I assume that the direct effect of technical progress on relative marginal products is neutral but that relative incomes are eventually affected because the structure of demand is not invariant with technical change. This essentially arises because preferences are not homothetic.

    We will analyze two different...

  13. 10 Nonhomothetic Preferences and the Distributive Effects of Innovation and Intellectual Property
    (pp. 174-183)

    In this chapter, we build on the models analyzed in the previous chapter to discuss the distributive effects of innovation between rich and poor. While the previous chapter analyzed how, under nonhomothetic preferences, productivity growth and innovation affect the functional distribution of income, in particular through markups, here we focus on their effect on utility. We focus on how rich and poor may value the introduction of new goods differently, because, under nonhomothetic utility, they face a different trade-off between the physical quantity of goods consumed and the number of different goods. To understand this conflict of interest and insulate...

  14. Epilogue
    (pp. 184-186)

    We have analyzed the different channels through which technical change affects the distribution of income.

    We started with models where labor is a homogeneous input, and the only distributive issue is between labor and capital. In these models, there are two basic effects. On the one hand, technical progress makes workers more productive: this tends to increase their income, as the physical number of goods that they can produce per unit of time goes up. On the other hand, technical progress may increase the total amount of labor, defined in efficiency units, available. That effect reduces the price of labor...

  15. References
    (pp. 187-190)