Download ROLES OF GOVERNMENT IN TECHNOLOGICAL PROMOTION AS …

An Analytical Framework
of Government Role in
Technological Promotion
as a Cause of Inequality
INTRODUCTION
“For the poor shall never cease
out of the land”
(Deuteronomy 15:11)

Thailand is one of the most rapid growth
country for the last several decades,
whilst inequality has increased.
INTRODUCTION


increasing of inequality in the laborabundant countries does not align with
prediction in Stolper-Samuelson
Theorem
International trade liberalization and
technological change are generally
accepted as the mutual cause of
inequality.
INTRODUCTION

It is obviously seen that technological
improvement grows faster and faster,
moreover, growth direction is asymmetry



developed VS developing countries.
“skilled labor biased technical change”
In some developing countries, especially
for Thailand, the government plays the
greater role in R&D than private sector
INTRODUCTION
Table 1
R&D expenditure, percentage of
overall domestic’s R&D expenditure
Country Government Industrial Education
sector
sector
sector
China
25%
63%
12%
Malaysia
25%
58%
17%
Korea
15%
74%
11%
USA.
11%
73%
12%
Thailand
46%
35%
18%
INTRODUCTION


Limited role of developed countries’
government in R&D sector may be result
in negligence in roles of government in
technology promotion for economists.
Therefore, this study will focuses on
roles of government as technology
promoter in the model.
INTRODUCTION

This study focuses on 3 factors:
 the government who plays a role as
technology promoter
 The increase in skilled labors
 relative world prices
INTRODUCTION
Objectives of study
1) To construct the model including the
role of government in technology
promoting in the context of open trade
economy
2) To explain the impact of changes in
relative world price and labors force on
the inequality through the channel of
government’s technological promotion
THE MODEL





The setup
The production side
Consumer side
GDP , DNI and pDNI of Economy
Central planner’s problem
The set up
 One small and free trade economy
 The economy last only two period, t 1, 2
 There are 2 goods, X and Y with the price
PXW,t and PYW,t
 There are 2 factor; skilled labors, H, and
unskilled labors, L, whose wages at rate
wL ,t and wH ,t
The set up
 Fix amount of skilled labors and unskilled,
S
S
L
H t and t
 All goods and factors market are perfectly
competitive.
The set up
 production function of X and Y
 1

X tP   X  AL ,t LX ,t    1   X   AH ,t H X ,t 


 1  1

 1

Yt P   Y  AL ,t LY ,t    1   Y   AH ,t H Y ,t 





 1  1




The set up
Where
 AL ,t  0 and AH ,t  0 are efficiency of
unskilled labors and skilled labors.
  i is a distribution parameter which
determines how important the two factor
are. Given 0   Y   X  1 implies that
unskilled labors intensive relative to Y.
    0,   is the elasticity of substitution
between two factors
The set up
 Note that we superscript P to specify
equation (3.1) and (3.2) as The amount of X
and Y produced in economy.
P
P
X
Y
 t and t are not necessary to equal to the
amount of X and Y consumed in economy,
X tC and Yt C .
The set up



The central planner collects ad-varolem
tax at rate  equally on every labor’s
income in the first period.
In the first period, the revenue are
distributed into GL and GH for promoting
efficiency of unskilled labors and skilled
labors in second period
In the second period, Central planner will
do nothing.
The set up

The objective of central planner is to
maximize summation of per capita
Disposable National Income (pDNI) of two
periods .
The set up

Growth efficiency of labors can be
explained by the equations as follow
AL ,2  AL ,1  L GL 

AH ,2  AH ,1  H GH  ;

0   1
Where  L and  H are coefficient of G j where
j L, H 
The production side
Equilibrium Conditions


There are 2 groups of equilibrium
conditions.
Firstly, Zero-profit conditions,
W
X ,t
P
 MC X ,t  wL ,t , wH ,t 
P  MCY ,t  wL ,t , wH ,t 
W
Y ,t
The production side
Equilibrium Conditions

The others conditions are full employment
conditions.
L X
S
t
P
t
H X
S
t
MC X ,t  wL,t , wH ,t 
wL,t
P
t
 Yt
MC X ,t  wL,t , wH ,t 
wH ,t
P
 Yt
MCY ,t  wL,t , wH ,t 
wL,t
P
MCY ,t  wL ,t , wH ,t 
wH ,t
The production side
Equilibrium Conditions

Since there are 4 equilibrium conditions
(equations) and 4 endogeneous variables,
P
P
,wL,t , wH ,t , X t , Yt ,we can solve for
P
t
wL,t , wH ,t , X , Yt
P
The production side
Equilibrium wages and outputs

After minimizing cost, the cost functions of
X and Y are
1
1 6 1
H ,t

  1 1 6

C X ,t  wL ,t , wH ,t , X   X  X AL ,t wL ,t  1   X  AH ,t1w 


P
t
P
t
1
16 1
H ,t

  1 1 6

CY ,t  wL ,t , wH ,t , Yt   Yt  Y AL ,t wL ,t  1   Y  AH ,t1w 


P
P
The production side
Equilibrium wages and outputs

After deriving the marginal cost functions
and then solving the zero profit conditions,
skilled and unskilles labors wages are,
wH ,t  AH ,t
    PW 1     PW 1
Y
X ,t
 X Y ,t
  X 1   Y   1   X   Y





1
1
 1     PW 1  1     PW 1 
Y
X ,t
X
Y ,t


wL,t  AL,t

 



 X 1   Y   1   X   Y


1
1
The production side
Equilibrium wages and outputs
 Due to taxation, wages in the first period
must be separate into 2 types: the market
wages and the disposable wages.
The production side
Equilibrium wages and outputs
 the market wages are the wages
producer pay for labors
 the disposable wages are the wages
labors actually receive after tax
The production side
Equilibrium wages and outputs


Since elasticity of supply for labors are
zero (due to and are fix amount), labors
will bare the full burden of tax.
We can re-specify market wages and
disposable wages as follows.
The production side
Equilibrium wages and outputs
wHM,1
    PW 1     PW 1
X
Y ,1
Y
X ,1
 AH ,1  
  X 1   Y   1   X   Y





1
1
 1     PW 1  1     PW 1
Y
X ,1
X
Y ,1
M

wL,1  AL,1

 


 X 1   Y   1   X   Y

D
H ,1
w
 1   w
M
H ,1




1
1
w  1   w
D
L ,1
M
L ,1
The production side
Equilibrium wages and outputs
wH ,2
wL,2
    PW 1     PW 1
X
Y ,2
Y
X ,2

 AH ,2 
  X 1   Y   1   X   Y





1
1
 1     PW 1  1     PW 1
Y
X ,2
X
Y ,2

 AL,2

 


 X 1   Y   1   X   Y





1
1
The production side
Equilibrium wages and outputs


Rate of market wages and wages before
taxation are the same because employers
do not bare the tax burden at all.
Note that disposable wages and the wages
in the second period are not equilibrium
wages yet until equilibrium central
planner’s tax rate and expenditure are
already solved.
The production side
Equilibrium wages and outputs

After solving the full-employment
conditions, the equilibrium outputs are
X p
P
t
W
X

Yt P   pYW 

1   Y 

1
L ,t
A
w L  Y A
6
L ,t
S
t

1
H ,t
6
H ,t
w
H
S
t
 X 1   Y   1   X   Y



X A

1
H ,t

w H  1   X  AL1,t wL6,t LSt
6
H ,t

S
t
 X 1   Y   1   X   Y




The production side
Equilibrium wages and outputs
 This implies that the equilibrium
outputs are not affected by tax due to
insensitivity of the market wages to tax.
Consumer side

We set consumer’s utility maximization
problem as follows,
Max
C
C
X t ,Yt
S .T .
2
2
t 1
t 1
t 1
C C
U


X
,0   1
 t 
t Yt
PXW,1 X 1C  PYW,1Y1C  wLD,1 L1S  wHD ,1 H1S
PXW,2 X 2C  PYW,2Y2C  wL,2 LS2  wH ,2 H 2S
Consumer side

The equilibrium consumption in the first
period are
X 
C
2
Y 
C
2
w L  wH ,2 H
S
L ,2 2
S
2
W
X ,2
2P
w L  wH ,2 H
S
L ,2 2
W
Y ,2
2P
S
2
Consumer side

And the equilibrium consumption in the
second period are
X 
C
1
Y 
C
1
w L w H
D S
L ,1 1
D
H ,1
S
1
W
X ,1
2P
w L w H
D S
L ,1 1
D
H ,1
W
Y ,1
2P
S
1
 1   
w L w H
 1   
w L w H
M S
L ,1 1
M
H ,1
S
1
W
X ,1
2P
M S
L ,1 1
M
H ,1
W
Y ,1
2P
S
1
GDP , DNI and pDNI of
Economy

There are 3 approach for calculating Gross
Domestic Product (GDP)
 output approach
 expenditure approach
 income approach
GDP , DNI and pDNI of
Economy
GDPt  p X  p Y
O
W
X
GDP  p
E
2
W
X ,2
P
t
W
P
Y t
X p Y
C
2
W C
2 2
GDP1E  pWX ,1 X1C  pYW,1Y1C  GL  GH
GDP  w L  wH ,2 H
I
2
S
L,2 2
GDP  w L  w H
I
1
M S
L,1 1
M
H ,1
S
1
S
2

GDP , DNI and pDNI of
Economy
This study have proved that
GDPt  GDPt O  GDPt E  GDPt I


(3.70)
This implies that central planner’s taxation
(or expenditure) dose not affect GDP in the
first period because the value of GDP1O is
not affected by tax.
On the contrary, central planner’s action
affect economy’s GDP at the second
period due to increasing of AH ,2 and AL,2
GDP , DNI and pDNI of
Economy

Disposable National Income (DNI) is the
income that labors can actually spend for
purchasing
DNIt  GDPt  total tax

National Income (pDNI) is average DNI per
one labor in economy.
DNI t
pDNI t  S
S
Lt  H t
Central planner’s problem

The central planner’s problem is set up as
follows.
2
Max
 ,GL ,GH
S .T .

t 1
t 1
G
pDNI ; 0  G  1
  wLM,1L1S  wHM,1H1S   GL  GH , 0   1
Central planner’s problem
The equilibrium expenditure are
1


1


1




1


 
LS2  L1S  H1S   1   Y   PXW,2   1   X   PYW,2   

 
GL   L  AL,1 S

 
S


 
L

H
 X 1   Y   1   X   Y
2
2


 


1


1


1


1


 
H 2S  L1S  H1S    X  PYW,2    Y  PXW,2   

 
GH   H  AH ,1

 
S
S


L

H
 X 1   Y   1   X   Y  
2
2


 


1
1
1
1
Central planner’s problem

the equilibrium tax rate is
1
1


L H  
1
    G
  M S M S 
L  H   wL,1L1  wH ,1H1 

S
1
S
2
S
1
S
2



W 1
W 1 

 
1   Y   PX ,2   1   X   PY ,2  
S 
 L AL,1L2

 




1



1


Y





X
Y
X



1
1
    PW 1     PW 1 
X
Y ,2
Y
X ,2

  H AH ,1H 2S  

 
  X 1   Y   1   X   Y 


1
1 1
1





Defining terms


In this study, Inequality refers to relative
wage
1
1

W 1

W 1


 X  PY ,t    Y  PX ,t 
wH ,t AH ,t



1
1


W
W

wL,t
AL,t 1     P   1     P  
Y
X ,t
X
Y ,t


There is perfect equality when
wH ,t
wL ,t
1
Defining terms

Given initial relative wage is more than one,
 the inequality rises when the relative
wage increases
 the inequality falls when the relative
wage increase
 The interpretation is opposite when initial
relative wage is less than one.
Defining terms

“expenditure ratio” is the skilled to
unskilled ratio of expenditure on promoting
their efficiency


W 1

W 1

S
 X  PY ,2    Y  PX ,2 
GH   H AH ,1 H 2 

GL   L AL ,1 LS2  1     PW 1  1     PW 1
Y
X ,2
X
Y ,2






1
1





1
1
Defining terms

The “efficiency ratio” is the skilled to
unskilled ratio of labor efficiency
AH ,2
AL ,2

AH ,1   H GH 



AL ,1   LGL 
Defining terms

The growth patterns of labor force are
stylized as follows.
H  nH H
L n L
S
2

S
2
S
L 1
We define  t  H
S
t
S
t
L , therefore
 2  n1

n
S
1
is called labor growth ratio.
Defining terms

In this study, the term “endowment” refers
to exogeneous variable, except for relative
world price, in the first period.
Central planner’s expenditure
and dynamic Inequality
 Though all exogeneous variables do not
change, central planner still plays an important
role in changing relative wage by himself.
 Given every other exogeneous vaariables
unchanged throughout two periods, relative
wage in both periods are the same if efficiency
ratio in the second period is equal to efficiency
ratio endowment.
Central planner’s expenditure
and dynamic Inequality
  is called the critical value of the labor
proportion which makes the efficiency
ratio in the second period equal to its
*
AH ,1
AH ,2
endowment AL ,1  AL ,2
Central planner’s expenditure
and dynamic Inequality
 We can conclude that.



wH ,2
wL,2
wH ,2
wL,2
wH ,2
wL,2



wHD ,1
D
L ,1
D
H ,1
D
L ,1
D
H ,1
D
L ,1
w
w
w
w
w
if
 2  *
if
2  
if
2  
*
*
Central planner’s
expenditure and dynamic
Inequality
 To maximize total pDNI of economy,
central planner tends to expend more on
promoting efficiency of the larger group in
the second period rather than the smaller
group
 because the expenditure will more
effectively increase pDNI in the second
period.
Central planner’s
expenditure and dynamic
Inequality
 increasing in the expenditure ratio leads
to increasing in the efficiency ratio, in the
other word, skilled biased technology
progress.
 increasing in the efficiency ratio results in
increasing in inequality.
A change in the labor proportion
and dynamic inequality


Remind that  t  H L
the elasticity is defined as follow
S
t
 ,t 
  wH ,t wL ,t 
 t
S
t
t

wH ,t wL ,t
where is  ,t labor proportion elasticity of
relative wage in the t th period
A change in the labor proportion
and dynamic inequality



For the first period,  ,1  0
This implies that relative disposable wage is
not affected by a small change in labor
proportion.
This result aligns with the prediction in Factor
Price Insensitivity Lemma (Feenstra, 2003).
A change in the labor proportion
and dynamic inequality

For the second period, the derivative of the
relative wage with respective the labor
proportion in the second period is
d  wH ,2 wL,2    wH ,2 wL,2    AH ,2 AL,2    GH GL 

d 2
 2
  AH ,2 AL,2    GH GL 

And,  ,2 

1 
A change in the labor proportion
and dynamic inequality


Since 0    1 ,  ,2  0 .
Unlike the first period, In the second period, a
small increase (decrease) of labor proportion
leads to an increase (decrease) of relative
wage.
A change in the labor proportion
and dynamic inequality

Comparing to the case of unchanged labor
proportion, if the labor proportion in the
second period increases, central planner will
expect that change and sacrifice more budget
for promoting efficiency of skilled labors.
A change in the labor proportion
and dynamic inequality

Therefore technology is biased to skilled
labors in the second period, i.e. the efficiency
ratio increases. Increasing of the efficiency
ratio leads to increasing of the relative wage in
the second, comparing to the case of
unchanged labor proportion.
A change in the labor proportion
and dynamic inequality

After integrating all implication in both previous and
this section, the dynamic inequality under changing
of the labor proportion can be conclusion as follows.
 When labor proportion increase (decrease) from  1 in
the first period to  2 in the second period,
(1) if the labor proportion in the first period is more (less)
than the critical value, inequality in the second
period will increase (decrease) from the first period
more extremely than the case of unchanged labor
proportion
A change in the labor proportion
and dynamic inequality
(2) if the labor proportion in the first period less (more)
than the critical value
(2.1) if the labor proportion in the second period is still less
(more) than the critical value, inequality in the second
period will still decrease (increase) from the first period but
decreasing (increasing) will be less extreme than the case
of unchanged labor proportion
(2.2) if the labor proportion in the second period is more (than)
than the critical value, inequality in the second period will
increase (decrease) from the first period
A change in the relative world
price and dynamic inequality

the elasticity is defined as
  wH ,t wL,t  PXW,t PYW,t
 P ,t 

W
W
  PX ,t PY ,t  wH ,t wL ,t
where  P ,t is relative world price elasticity of
th
relative wage in the t period, .
A change in the relative world
price and dynamic inequality

For the first period,
P ,1  




X
1   Y   1   X 

1
W



P
X ,1


 X   Y  W 
P 

 Y ,1 


P
  
 P

W
X ,1
W
Y ,1

Y
1



1
W



P

X ,1
 1   Y   W 
P 

 Y ,1 

 1   X 





0
This study has already proved that P ,1  1
A change in the relative world
price and dynamic inequality



We can conclude that, in the first period, the
relative wage increases (decreases) more
rapidly than small decreasing (increasing) of
the relative world prices.
This conclusion is identical to the prediction in
Stolper-Samuelson theorem.
economy produces more goods X and less
goods Y when relative world price increases.
A change in the relative world
price and dynamic inequality



Since goods X is unskilled labor intensive
while goods Y is skilled labor intensive,
producers need more unskilled labors but less
skilled labors.
Then real skilled labor wages decreases, but
real unskilled labor wages increases
The relative wage in the first period decrease
in consequence.
A change in the relative world
price and dynamic inequality

For the second period, the derivative of the
relative wage with respective the relative
world price in the second period is
d  wH ,2
d  PXW,2
1
W




P


 X   Y  XW,2 
wL,2  
PY ,2 




1
W
W
PY ,2  
  PX ,2 
 
 1   Y   PW   1   X  


 Y ,2 

  wH ,2 wL,2 
  PXW,2 PYW,2 
1
1
 AH ,1     G  1    GH GL 
H
H

    
W
W
 AL,1   L   GL     PX ,2 PY ,2 
A change in the relative world
price and dynamic inequality

Therefore,
P ,2

1
P 
 X 1   Y   1   X   Y  




P 
1


1
1
W
W
1  


 PX ,2  
  PX ,2 



1   Y   W   1   X    X   Y  W  
P 
P  


Y ,2 

 Y ,2  


W
X ,2
W
Y ,2
Since 0    1 , we can conclude that
P ,2  P ,1  1
A change in the relative world
price and dynamic inequality

This means that, if the relative world price
increases (decreases) by the same small
percentage, the relative wage in the second
period will decreases (increases) more rapidly
than the relative wage in the first period.
A change in the relative world
price and dynamic inequality


For explanation, when the technology level is
fixed, mechanism of impact on the relative
wage can be explained by the mechanism in
Stolper-Samuelson theorem.
But, in the second period when there is
technology progress, Stolper-Samuelson’s
mechanism is reinforced through skilledbiased technological progress.
A change in the relative world
price and dynamic inequality


Increasing of relative world price could be
previously expected by central planner in the
first period.
To increase output of X for maximizing pDNI,
central planner expended more for promoting
efficiency of unskilled labors relative to skilled
labors in the past and, in present period,
technology is biased to unskilled labors in
consequence.
A change in the relative world
price and dynamic inequality


Unskilled biased technology results in
decreasing in the relative wage.
Since impact from Stolper-Samuelson’s
mechanism and impact skilled biased
technological progress have the same
direction, the relative world price affects
relative wage in the second period more
extremely than the first period.
A change in the relative world
price and dynamic inequality

After integrating all of conclusion from this and
previous sections, the dynamic inequality under
changing of the relative world price can be
conclusion as follows.
(1) When the relative world price in the first period
slightly decreases (increases), inequality the first
period increases (decreases) but inequality in the
second period is the same as the case of unchanged
relative world price.
A change in the relative world
price and dynamic inequality
(2) When the relative world price in the second period
slightly decreases (increases),
(2.1) if the labor proportion in the second period is more (less)
than the critical value, inequality in the second period will
increase (decrease) from the first period more extremely than
the case of unchanged relative world price.
(2.2) if the labor proportion in the second period is less (more)
than the critical value, inequality in the second period will still
decrease (increase) from the first period but decreasing
(increasing) will be less extreme than the case of unchanged
relative world price.
Implication of changing in
inequality
Implication 1
Without government as technology
promoter, inequality arises from
 skilled biased technological change, i.e.
increasing of efficiency ratio
 increasing (decreasing) of price of goods
which is skilled(unskilled)-labor intensive.
Implication of changing in
inequality
Implication 2
Given amount of labors and world prices being
equal throughout two periods, under actions of
national income maximizing government as
technology promoter ,
 government is “inequality creator” if
unskilled labors is minority group
 government is “inequality reducer” if
skilled labors is minority group.
Implication of changing in
inequality
Implication 3
Under actions of national income maximizing
government as technology promoter,
 any external factors which increases
(decreases) unskilled (skilled) labors
in the second period can decrease
inequality.
Implication of changing in
inequality
 For example, assume that all immigrants
are accepted as citizen by local
government. Immigrant permission policy
in the long-run will reduce inequality in
the second period if there most of
immigrants are unskilled labors.
Implication of changing in
inequality
Implication 4
Under actions of national income maximizing
government as technology promoter,
 any external shocks through swing in
relative price leads to more extreme
fluctuation of
local relative wage,
comparing to the case of without
government as technology promoter.
Implication of changing in
inequality
Implication 5
Both Increasing (decreasing) of skilled
(unskilled)
labors
and
increasing
(decreasing) of price of goods which is
skilled(unskilled)-labor intensive in the
second period will retard government’s
inequality
reduction
but
reinforce
government’s inequality creation.
Implication of changing in
inequality
Implication 6
Under actions of national income maximizing
government as technology promoter,
 any government policies which decrease
(increase) of price of goods which is
skilled(unskilled)-labor intensive will reduce
inequality
 any
government
policies
which
increase
(decrease) of price of goods which is
skilled(unskilled)-labor
intensive
will
create
inequality.
Implication of changing in
inequality
For example
 For imported goods, if government decreases
(increases) tariff rate on skilled(unskilled)-labor
intensive goods, inequality will be reduce. If
government acts oppositely, inequality will be
created.
 if government decreases (increases) commercial
tax rate on skilled(unskilled)-labor intensive goods,
inequality will be reduce. If government acts
oppositely, inequality will be created.
End
of
presentation