Distribution and Growth in an Economy with Limited Needs
AbstractThis paper studies a model of the distribution of income under bounded needs. Utility derived from any given good reaches a bliss point at a finite consumption level of that good. On the other hand, introducing new varieties always increases utility. It is assumed that each variety is owned by a monopoly. Workers can specialize in material goods production or in the knowledge sector, which designs new varieties. It is shown that if the elasticity of labor supply to the knowledge sector is bounded, as productivity increases, the economy moves from a “Solovian zone” where wages increase with productivity, to a “Marxian” zone where the paradoxically decline with productivity. This is because as consumption of a given good increases, the price elasticity of demand falls, and markups increase to infinity as consumption reaches the unit elasticity point. Such a point typically exists because of the finiteness of needs. It is also shown that if individual creativity is more unevenly distributed then productivity, technical progress always increases inequality. Redistribution from profits to workers in the production sector always benefits arbitrarily poor workers regardless of their distortionary effect on the number of varieties, because diversity is not valued by very poor agents. In contrast, rich agents close enough to their bliss point can only be made better-off by an increase in diversity. If wages are set by monopoly unions rather than set competitively, they are proportional to productivity and the Marxian zone no longer exists. But technical progress always reduces employment in the material goods sector. International trade may reduce wages in poor countries and increase them in rich countries if under autarky the former consume less of each good that the latter.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 273.
Length: 57 pages
Date of creation: Mar 2001
Date of revision:
Publication status: published in: Economic Journal, 2006, 116 (511), 382-407
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Other versions of this item:
- Gilles Saint-Paul, 2001. "Distribution and Growth in an Economy with Limited Needs," CESifo Working Paper Series 423, CESifo Group Munich.
- Saint-Paul, Gilles, 2001. "Distribution and Growth in an Economy with Limited Needs," IDEI Working Papers 125, Institut d'Économie Industrielle (IDEI), Toulouse.
- D3 - Microeconomics - - Distribution
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Institutional; Evolutionary
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F15 - International Economics - - Trade - - - Economic Integration
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
- O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
- O3 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
This paper has been announced in the following NEP Reports:
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