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Does a Rising Tide Lift All Boats? Welfare Consequences of Asymmetric Growth

  • Murphy, Daniel

    (University of Michigan)

A common presumption in macroeconomics and development economics is that increased growth in the aggregate enhances welfare for everyone in the economy. I show that instead, if the underlying growth is a productivity increase in the sector consumed primarily by one group, the welfare of a second group may fall. I demonstrate this effect in two cases. In the first case, skill-biased technological change in sectors consumed by the skilled rich increases their income beyond the increase in economic wealth, causing a decline in the consumption and welfare of the low-skilled poor. This result stands in contrast to the standard model of skillbiased technological change. The second case examines trade between two countries, and demonstrates circumstances under which an increase in productivity in the nontradable sector of one country causes a welfare decline for the other country. The paper discusses evidence in support of the effects in both cases. This analysis demonstrates that a rising tide need not lift all boats and that the precise nature of consumption patterns is important for welfare.

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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 629.

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Length: 34 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:mie:wpaper:629
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  9. Josef Zweimueller, . "Schumpeterian Entrepreneurs Meet Engel's Law: The Impact of Inequality on Innovation-Driven Growth," IEW - Working Papers 009, Institute for Empirical Research in Economics - University of Zurich.
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