Connecting Patterns of Technical Change and Income Inequality

Abstract:

This paper studies the empirical relationship between patterns of technical change and income inequality from historical and political economy perspectives. Growth distribution schedules are constructed to determine the type of technical change undergone in a sample of Latin American countries from 1963 to 2008. Such patterns of technical change can be grouped into redistributive and nonredistributive. The expected theoretical relation under redistributive patterns of technical change is that income inequality should decrease when this type of pattern emerges. The study empirically verifies that this relationship emerges in several periods, but this outcome is only one of the possible results of the complex interaction between patterns of technical change and historical economic and political events. Combining our study of patterns of technical change with economic history reveals that the role of political and economic coalitions needs to be incorporated to understand the complex forces that determine changes in income distribution. The study concludes with provisions of a framework for understanding changes in income distribution during different episodes in our period of analysis, ranging from the era of military dictatorship to the most recent period. We highlight some policy implications that can be drawn from this framework.

Keywords:

• patterns of technical change
• growth-distribution schedule
• income inequality

Notes

Morley (2001) and Ocampo and Bertola (2012) have emphasized that job insecurity is a distinctive feature of labor markets in the neoliberal period.

The basic reason for plotting the GDS as linear is that the information required to plot them as higher-order polynomials (a series of input–output tables) is not available at the frequency of macroeconomic data such as the Extended Penn World Tables (EPWT4.0). Our empirical study is based on the work of scholars who have shown that most GDS schedules from empirical input–output tables are close to linear; and are thus a good first approximation to higher-order curves. Empirical evidence that the wage–profit relation in real economies can be approximated by linear functions is provided by Ochoa (1989) and Schefold (2008). A detailed study on the origins of the wage–profit curve and its relation with the Cambridge capital controversy can be found in Cohen and Harcourt (2003).

We will discuss external factors later in this section. For now we focus on the internal dynamics as well as differences across countries and take external factors as given.

The selection of the variables—minimum wage, social programs, increase in labor income, and a progressive tax system—is based on the work of scholars who have shown these variables to be relevant in decreasing inequality. See, for example, Cornia (2012) and Ocampo and Bertola (2012).

We use the phrase “political and economic coalition” to imply that is not only politicians behind the policies enforced in certain periods but also economic elites who support those regimes and push toward certain economic and political changes. Although they are more likely to promote progressive policies, a left-wing government is not essential to the emergence of progressive policies. After the 2000 election, Mexico transferred the power to a political party known for being politically and economically conservative. However, the forces unleashed by the fact that this party stopped more than seventy years of the previous ruling elite (Institutional Revolutionary Party [PRI]) had positive effects in terms of social policies. Meyer (2007) documents this transition.

We emphasize the word “likely” because there is no guarantee that these outcomes will take place, mainly because external factors such as the ones that took place during the debt crisis or the oil crisis can disrupt the outcome predicted by our framework. At the end of this section, we discuss how our framework can take into account external factors.

Additional information

Notes on contributors

Luis Villanueva

Luis Villanueva is an assistant professor of economics at Denison University, Higley Hall 207, Granville, OH; e-mail: [email protected]. The author is indebted to Duncan Foley, Xiao Jiang, and two anonymous referees for very helpful comments and suggestions. The responsibility for the text is the author’s.