Effects of Globalization on Growth and Inequality

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http://urn.fi/URN:NBN:fi:hulib-201703273620
Title: Effects of Globalization on Growth and Inequality
Author: Pilli-Sihvola, Matti
Other contributor: Helsingin yliopisto, Valtiotieteellinen tiedekunta, Politiikan ja talouden tutkimuksen laitos
University of Helsinki, Faculty of Social Sciences, Department of Political and Economic Studies
Helsingfors universitet, Statsvetenskapliga fakulteten, Institutionen för politik och ekonomi
Publisher: Helsingfors universitet
Date: 2016
Language: eng
URI: http://urn.fi/URN:NBN:fi:hulib-201703273620
http://hdl.handle.net/10138/167201
Thesis level: master's thesis
Discipline: Economics
Taloustiede
Ekonomi
Abstract: The aim of this study is to better understand how globalization affects growth and inequality. In order to do so, a growth model based on innovation driven economic growth featuring heterogeneous workers and firms is built to analyse growth and inequality first in autarky equilibrium and then in trading equilibrium. This model includes two sectors: manufacturing and research and development (R&D). Sorting and matching of heterogeneous workers and firms takes place in this model. High ability workers sort into the R&D sector, inventing new intermediate goods, and low ability workers sort into the manufacturing sector, assembling consumption goods. Matching of workers with firms within the sector takes place so that the most able worker in the R&D sector matches with a firm having the highest level of technology and earns the highest income. The least able worker in the R&D sector matches with a firm having the lowest level of technology in the R&D sector, earning the lowest income in the R&D sector. The same kind of matching takes place in the manufacturing sector. Endogenous cutoff ability level determines which workers sort into the manufacturing sector and which workers sort into the R&D sector. Income inequality rises from this heterogeneity of workers and firms. The built model is used to analyse how policy choices and technology parameters such as productivity in manufacturing, capacity to innovate, R&D support, manufacturing technologies, trade barriers, and knowledge spillovers affect growth and inequality in autarky and in trading equilibrium. This model shows that globalization speeds up growth, but it comes hand in hand with greater inequality. Also, policy choices and technology parameters have different effects on growth and inequality in autarky equilibrium than in trading equilibrium. For example, Hicks-neutral differences in manufacturing productivity between two countries result in equal growth rates in autarky as well as in trading equilibriums. Differences in government support for R&D activity increases growth more in a country were support is more ample also resulting in greater inequality in autarky equilibrium. In trading equilibrium, differences in government support for R&D activity induces more unequal wage distribution in a country supporting R&D activity more ample, but long-run growth rate is equal. This model does not comply with Kuznets U-shaped curve between growth and inequality.


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