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Gianluca Grimalda & Marco Vivarelli Working Paper 144/04

Gianluca Grimalda and Marco Vivarelli

CSGR Working Paper No. 144/04

October 2004


We draw on a dynamical two-sector model and on a calibration exercise to study the impact of a skill-biased technological shock on the growth path and income distribution of a developing economy. The model builds on the theoretical framework developed by Silverberg and Verspagen (1995) and on the idea of localised technological change (Atkinson and Stiglitz, 1969) with sector-level increasing returns to scale. We find that a scenario of catching-up to the high-growth steady state is predictable for those economies starting off with a high enough endowment of skilled workforce. During the transition phase, if the skill upgrade process for the workforce is relatively slow, the typical inverse-U Kuznets pattern emerges for income inequality in the long run. Small-scale Kuznets curves, driven by sectoral business cycles, may also be detected in the short run. Conversely, economies initially suffering from significant skill shortages remain trapped in a low-growth steady state. Although the long-term trend is one of decreasing inequality, small-scale Kuznets curves may be detected even in this case, which may cause problems of observational equivalence between the two scenarios for the policy-maker. The underlying factors of inequality, and the evolution of a more comprehensive measure of inequality than the one normally used, are also analysed.

JEL classification numbers: O33, O41.

Key words: Skill-biased technological change; inequality; Kuznets curve, catching-up.

Address for Correspondence:

Gianluca Grimalda

Centre for the Study of Globalisation and Regionalisation (CSGR),

University of Warwick

Coventry, CV4 7AL,UK

Marco Vivarelli

Università Cattolica, Piacenza;

Institute for the Study of Labour,

IZA-Bonn; and Max Planck Institute, Entrepreneurship, Growth and Public Policy Group, Jena.