Inequality and growth : a labor mobility and human capital analysis
We analyze the multiple connections between inequality and growth from a theoretical perspective. We first consider the debate on poverty, the Kuznets curve and the convergence of developing countries in an open-economy context. The economy is dual as in Kuznets. The two sectors interact in several important ways, however, which makes them complementary. Labor mobility between the two sectors is not perfect, and capital flows from abroad can only be directed to one of the two sectors. We show that inequality arises as a result of the limited mobility of labor across sectors despite the mobility of capital, and that it decreases monotonically with development. We also show how the "poor" benefit in several ways from an opening of the economy to capital flows, even though they may seem to gain less than the "rich" initially. While duality may be an appropriate description of many developing countries, it does not fit the structure of developed economies. We then consider an extension of a Schumpeterian model of endogenous growth with a continuum of sectors and where growth occurs through purposeful technological progress. Extending the process of creative destruction to jobs, we show how rigidities in the reallocation of the labor force across sectors generates equilibrium inequality. We also look at how such rigidities affect steady-state growth, which allows us show that inequality and growth may be related in a non-linear and non-monotonic way. This sheds new light on the growth/inequality nexus and underscores why it may be difficult to find a clear empirical relationship. Inequality has also tended to increase significantly over the past decades in most industrial countries. Skill-biased technological change is often advanced as the main explanation for such a rise. We note, however, that a large part of the increase in inequality can be attributed to the concentration of income and wealth at the very top of the distribution, which skill-biased technological change cannot explain. We argue that the increased prevalence of winner-take-all markets may explain this phenomenon and seek to explain why agents may want to acquire human capital to participate in such markets, as opposed to education. We show how incentives may be such that the poor are attracted disproportionately to invest in winner-take-all markets and thus reinforce ex-ante inequality and harm growth.