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Vintage Capital as an Origin of Inequalities

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  • Hornstein, Andreas
  • Krusell, Per
  • Violante, Giovanni L

Abstract

Does capital-embodied technological change play an important role in shaping labour market inequalities? This Paper addresses the question in a model with vintage capital and search/matching frictions where costly capital investment leads to large heterogeneity in productivity among vacancies in equilibrium. The Paper first demonstrates analytically how both technology growth and institutional variables affect equilibrium wage inequality, income shares and unemployment. Next, it applies the model to a quantitative evaluation of capital as an origin of wage inequality: at the current rate of embodied productivity growth a 10-year vintage differential in capital translates into a 6% wage gap. The model also allows a US – Continental Europe comparison: an embodied technological acceleration interacted with different labour market institutions can explain a significant part of the differential rise in unemployment and capital share and some of the differential dynamics in wage inequality.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3596.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3596

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Keywords: labour share; unemployment; vacancy heterogeneity; vintage capital; wage inequality;

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Citations

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Cited by:
  1. Christopher Pissarides & Giovanna Vallanti, 2004. "Productivity growth and employment: theory and panel estimates," LSE Research Online Documents on Economics 2189, London School of Economics and Political Science, LSE Library.
  2. Leonardi, Marco, 2003. "Firms' Heterogeneity in Capital/Labor Ratios and Wage Inequality," Royal Economic Society Annual Conference 2003 136, Royal Economic Society.
  3. Claudio Michelacci & David Lopez-Salido, 2007. "Technology Shocks and Job Flows," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1195-1227.
  4. Xavier Cuadras Morató & Xavier Mateos Planas, 2003. "Are changes in education important for the wage premium and unemployment?," Economics Working Papers 707, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Marco Leonardi, 2007. "Firm heterogeneity in capital-labour ratios and wage inequality," Economic Journal, Royal Economic Society, vol. 117(518), pages 375-398, 03.
  6. Fabio Canova & David Lopez-Salido & Claudio Michelacci, 2006. "Schumpeterian technology shocks," Economics Working Papers 1012, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2007.

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