Competition between workers and capitalists in the globalized world: A directed technical change approach

This paper analyzes, in the institutional context of globalized market economies, the competition between skilled and unskilled workers and between workers and capital owners (“capitalists”). We consider a directed technical change model with R&D and relocation of production from an innovative to a follower region. Relocations leverage the follower region's comparative advantages and improve resource allocation on a global scale. Consequently, resources are freed up for R&D, benefiting internationally available technological knowledge and ensuring higher economic growth and wages, with reduced inter‐region wage inequality. These effects can be enhanced by governmental actions promoting relocations or the producers' market power. Relocations benefit all economic agents' welfare through larger consumption levels and economic growth. But the actions of a region's government promoting market power impacts workers' and capitalists' welfare differently. The workers' welfare is affected by market power through two effects of opposite signs (it penalizes consumption but favors economic growth), while the capitalists' welfare is always improved by more market power. Accordingly, both capitalists and workers favor market power, but the former favor it more than the latter. Lower economic growth exacerbates the circumstances leading to conflict between workers and capitalists.