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Government spending composition, technical change and wage inequality

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Author Info
Guido Cozzi
Giammario Impullitti

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Abstract

In this paper we argue that government spending played a significant role in stimulating the wave of innovation that hit the U.S. economy in the late 1970s and in the 1980s, as well as the simultaneous increase in inequality and in education attainment. Since the late 1970’s U.S. policy makers began targeting commercial innovations more directly and explicitly. We focus on the shift in the composition of public demand towards high-tech goods which, by increasing the market-size of innovative firms, functions as a de-facto innovation policy tool. We build a quality-ladder non- scale growth model with heterogeneous industries and endogenous supply of skills, and show that increases in the technological content of public spending stimulates R&D, raise the wage of skilled workers and, at the same time, stimulate human capital accumulation. A calibrated version of the model suggests that government policy explains between 12 and 15 percent of the observed increase in wage inequality in the period 1976-91.

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Paper provided by Department of Economics, University of Glasgow in its series Working Papers with number 2009_02.

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Date of creation: Dec 2008
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Handle: RePEc:gla:glaewp:2009_02

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Related research
Keywords: R&D-driven growth theory; heteregeneous industries; fiscal policy composition; innovation policy; wage inequality; educational choice.;

Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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