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Inequality in an OLG economy with endogenous structural change

Author

Listed:
  • Krzysztof Makarski

    (Group for Research in Applied Economics (GRAPE)
    Warsaw School of Economics)

  • Joanna Tyrowicz

    (Group for Research in Applied Economics (GRAPE)
    University of Warsaw
    Institute of Labor Economics (IZA))

Abstract

We study the evolution of income and wealth inequality in an economy undergoing endogenous structural change with imperfect labor mobility. Our economy features two sectors: services and manufacturing. With faster TFP growth in manufacturing, labor reallocates from manufacturing to services. This reallocation is slower due to labor mobility frictions, which in turn, raises relative wages in services. As a result, income inequality is higher. Moreover, we study the impact of structural change on wealth inequality. Its economic intuition is more ambiguous. On the one hand, increased income dispersion implies increased dispersion in the ability to accumulate wealth across individuals. On the other hand, younger workers who hold the least assets are the most mobile across sectors. Their incomes are improved, which boosts their savings, which works towards equalizing wealth distribution. The consequence of these changes can by only verified with a computational model. To this end we construct and an overlapping generations model with two sectors: manufacturing and services. Our model also features heterogeneous individuals. With our model we are able to show how structural change affected the evolution of income and wealth inequality in Poland as of 1990.

Suggested Citation

  • Krzysztof Makarski & Joanna Tyrowicz, 2022. "Inequality in an OLG economy with endogenous structural change," GRAPE Working Papers 68, GRAPE Group for Research in Applied Economics.
  • Handle: RePEc:fme:wpaper:68
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    More about this item

    Keywords

    structural change; inequality;

    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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