Globalization and Wage Polarization

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.

Global Innovation Races, Offshoring and Wage Inequality

“…Although, the across‐sector average for Europe is fairly constant, in some innovation‐intensive industries Europe's share of global R&D grows substantially in this period. Similar trends are observable for the distribution of patent counts and citations (Cozzi and Impullitti, ; Akcigit et al., ). This suggests that US global technological leadership was increasingly challenged by foreign firms during the years of increasing wage inequality.…”

“…Figure provides a clear picture of convergence in global R&D efforts. Cozzi and Impullitti () and Akcigit et al (), show that a similar convergence path can be observed for innovation output, patents and its quality, patent citations.…”

“…The main contribution of this paper is first, to provide a theory of how faster international technology competition affects wage inequality—a channel that is not explored in the existing literature—and secondly, to quantify the contribution of this specific channel to the path of inequality observed in US data. In a companion paper, Cozzi and Impullitti () endogenize international competition making it dependent on differences in innovation technology/capabilities across countries. Similarly to what I do here, Cozzi and Impullitti () study the effects of increasing foreign technology competition on innovation and wage inequality, but they focus on wage polarization across different tasks (innovation, production and personal services), and do not consider the possibility of offshoring.…”

“…In a companion paper, Cozzi and Impullitti () endogenize international competition making it dependent on differences in innovation technology/capabilities across countries. Similarly to what I do here, Cozzi and Impullitti () study the effects of increasing foreign technology competition on innovation and wage inequality, but they focus on wage polarization across different tasks (innovation, production and personal services), and do not consider the possibility of offshoring.…”

Trade, educational costs, and skill acquisition

“…Part (b) of Proposition 7 shows that enhanced education technology in one country could lead to “vanishing middle class” of its trading partner. However, the reason for this to happen is not the commonly believed “import competition.” In Cozzi and Impullitti (), reduction in the technology gap results in polarization in the more advanced trading partner, because competition from less developed countries has a business‐stealing effect, reducing wages of production workers in the leading economy and making it harder for domestic firms to innovate, thus pushing them to devote more labor resources to innovation. This triggers an increase in the demand for skilled workers and the service workers (the lowest‐ability individuals), creating the polarization.…”