Technology and inequality

This thesis is composed by three studies, whose common goal is advancing our knowledge of the properties of cross-country production technologies In the first part we focus on across-country inequality, tackling the issue of cross-country dispersion of incomes. The objective of growth theory is that of explaining the observed shape of the world income distribution (WID) and to eventually predict its future evolution. The existence of large cross-country productivity differences, measured by the residual dispersion of incomes left unexplained by the dispersion of observable quantities (physical and human capital), calls for the rejection of the hypothesis of a common world technology. We introduce a novel specification of the technology index, linking productivity to cross-country knowledge spillovers, that is empirically testable and has the potential to account for the observed pattern of productivity differences. We investigate two possible knowledge spillovers structures in a dynamic general equilibrium framework, and we characterize the equilibrium or long-run WID for each of them. We show that with appropriate technology knowledge spillovers, in which each country extracts useful knowledge only from countries operating similat technologies, the long-run WID is in general clustered and the world economy is splitted in distinct technological neighbourhoods, giving a possible explanation for the endogenous formation of convergence clubs. With backward knowledge spillovers, where the technology diffusion process is blocked by barriers to technology adoption measured by the aggregate capital intensity of an economy, the shape of the long-run WID is controlled by the strenght of the spillovers force and the degree of increasing returns of the world economy. We show that an increase of the spillovers force always amplifies the dispersion of the equilibrium WID and that growth and inequality are negatively related: the less dispersed the WID, the higher the equilibrium world rate of the world economy. In the second part we analyse the pattern of cross-country productivity differences and we test the specification of the technology index introduced in the first part. In particular we test the knowledge spillovers structures introduced in the first part over two dimensions: their ability to explain static observed cross-country productivity differences at a point in time and their consistency with the shape of the observed world income distribution. Using regression analysis to calibrate the fundamental parameters of our specification, we show that both appropriate technology and backward spillovers can explain over half of the observed productivity differences, but backward spillovers are more successful in replicating the actual shape of the WID. In the third part we tackle the issue of within-country inequality, as measured by the skill premium, the wage of skilled workers relative to that of the unskilled. We study the ability of the capital-skill complementarity hypothesis (CSC), that assumes that capital substitutes unskilled labor more easily than skilled labor, to explain observed cross-country dispersion of the skill premium. We perform a steady-state analysis, novel to the literature about CSC, linking steady-state skill premia to the relative supply of unskilled labor and to observables that control the capital accumulation process (saving rates and barriers to capital accumulation, measured by the relative price of investments). We show that CSC holds in non-OECD countries but not in the OECD subsample, reinforcing a result obtained by other studies with different techniques: this result also show a fundamental cross-country parameter heterogeneity in the production function. As a by-product of our steady-state analysis we are also able to obtain new estimates for the elasticity of substitution between couples of inputs and to discriminate between alternative thresholds for the definition of skilled labor with respect to their consistentcy with plausible values of these elasticities. Finally, the fact that observable quantities are able to explain only a limited share of cross-country dispersion of skill.premia suggests that cross-country skill-biased technology differences are at work, and capital accumulation alone cannot explain neither income differences nor cross-country differences in inequality.