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An Analytical Framework of Government Role in Technological Promotion as a Cause of Inequality

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INTRODUCTION “For the poor shall never cease out of the land” (Deuteronomy 15:11) Thailand is one of the most rapid growth country for the last several decades, whilst inequality has increased.

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INTRODUCTION increasing of inequality in the labor- abundant countries does not align with prediction in Stolper-Samuelson Theorem International trade liberalization and technological change are generally accepted as the mutual cause of inequality.

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INTRODUCTION It is obviously seen that technological improvement grows faster and faster, moreover, growth direction is asymmetry developed VS developing countries. “skilled labor biased technical change” In some developing countries, especially for Thailand, the government plays the greater role in R&D than private sector

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INTRODUCTION Table 1 R&D expenditure, percentage of overall domestic’s R&D expenditure

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INTRODUCTION Limited role of developed countries’ government in R&D sector may be result in negligence in roles of government in technology promotion for economists. Therefore, this study will focuses on roles of government as technology promoter in the model.

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INTRODUCTION This study focuses on 3 factors: the government who plays a role as technology promoter The increase in skilled labors relative world prices

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INTRODUCTION Objectives of study 1) To construct the model including the role of government in technology promoting in the context of open trade economy 2) To explain the impact of changes in relative world price and labors force on the inequality through the channel of government’s technological promotion

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THE MODEL The setup The production side Consumer side GDP, DNI and pDNI of Economy Central planner’s problem

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The set up One small and free trade economy The economy last only two period, There are 2 goods, X and Y with the price and and There are 2 factor; skilled labors, H, and unskilled labors, L, whose wages at rate and and

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The set up Fix amount of skilled labors and unskilled, and and All goods and factors market are perfectly competitive.

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The set up production function of X and Y

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The set up Where and are efficiency of unskilled labors and skilled labors. is a distribution parameter which determines how important the two factor are. Given implies that unskilled labors intensive relative to Y. is the elasticity of substitution between two factors

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The set up Note that we superscript P to specify equation (3.1) and (3.2) as The amount of X and Y produced in economy. and are not necessary to equal to the amount of X and Y consumed in economy, and. and.

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The set up The central planner collects ad-varolem tax at rate equally on every labor’s income in the first period. In the first period, the revenue are distributed into and for promoting efficiency of unskilled labors and skilled labors in second period In the second period, Central planner will do nothing.

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The set up The objective of central planner is to maximize summation of per capita Disposable National Income (pDNI) of two periods.

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The set up Growth efficiency of labors can be explained by the equations as follow Where and are coefficient of where

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The production side Equilibrium Conditions There are 2 groups of equilibrium conditions. Firstly, Zero-profit conditions,

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The production side Equilibrium Conditions The others conditions are full employment conditions.

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The production side Equilibrium Conditions Since there are 4 equilibrium conditions (equations) and 4 endogeneous variables,,,we can solve for

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The production side Equilibrium wages and outputs After minimizing cost, the cost functions of X and Y are

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The production side Equilibrium wages and outputs After deriving the marginal cost functions and then solving the zero profit conditions, skilled and unskilles labors wages are,

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The production side Equilibrium wages and outputs Due to taxation, wages in the first period must be separate into 2 types: the market wages and the disposable wages.

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The production side Equilibrium wages and outputs the market wages are the wages producer pay for labors the disposable wages are the wages labors actually receive after tax

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The production side Equilibrium wages and outputs Since elasticity of supply for labors are zero (due to and are fix amount), labors will bare the full burden of tax. We can re-specify market wages and disposable wages as follows.

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The production side Equilibrium wages and outputs

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The production side Equilibrium wages and outputs

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The production side Equilibrium wages and outputs Rate of market wages and wages before taxation are the same because employers do not bare the tax burden at all. Note that disposable wages and the wages in the second period are not equilibrium wages yet until equilibrium central planner’s tax rate and expenditure are already solved.

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The production side Equilibrium wages and outputs After solving the full-employment conditions, the equilibrium outputs are

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The production side Equilibrium wages and outputs This implies that the equilibrium outputs are not affected by tax due to insensitivity of the market wages to tax.

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Consumer side We set consumer’s utility maximization problem as follows,

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Consumer side The equilibrium consumption in the first period are

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Consumer side And the equilibrium consumption in the second period are

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GDP, DNI and pDNI of Economy There are 3 approach for calculating Gross Domestic Product (GDP) output approach expenditure approach income approach

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GDP, DNI and pDNI of Economy

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This study have proved that (3.70) This implies that central planner’s taxation (or expenditure) dose not affect GDP in the first period because the value of is not affected by tax. On the contrary, central planner’s action affect economy’s GDP at the second period due to increasing of and

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GDP, DNI and pDNI of Economy Disposable National Income (DNI) is the income that labors can actually spend for purchasing National Income (pDNI) is average DNI per one labor in economy.

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Central planner’s problem The central planner’s problem is set up as follows.

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Central planner’s problem The equilibrium expenditure are

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Central planner’s problem the equilibrium tax rate is

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Defining terms In this study, Inequality refers to relative wage There is perfect equality when

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Defining terms Given initial relative wage is more than one, the inequality rises when the relative wage increases the inequality falls when the relative wage increase The interpretation is opposite when initial relative wage is less than one.

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Defining terms “expenditure ratio” is the skilled to unskilled ratio of expenditure on promoting their efficiency

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Defining terms The “efficiency ratio” is the skilled to unskilled ratio of labor efficiency

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The growth patterns of labor force are stylized as follows. We define, therefore is called labor growth ratio. Defining terms

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In this study, the term “endowment” refers to exogeneous variable, except for relative world price, in the first period.

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Central planner’s expenditure and dynamic Inequality Though all exogeneous variables do not change, central planner still plays an important role in changing relative wage by himself. Given every other exogeneous vaariables unchanged throughout two periods, relative wage in both periods are the same if efficiency ratio in the second period is equal to efficiency ratio endowment.

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Central planner’s expenditure and dynamic Inequality is called the critical value of the labor proportion which makes the efficiency ratio in the second period equal to its endowment

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Central planner’s expenditure and dynamic Inequality We can conclude that. if

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Central planner’s expenditure and dynamic Inequality To maximize total pDNI of economy, central planner tends to expend more on promoting efficiency of the larger group in the second period rather than the smaller group because the expenditure will more effectively increase pDNI in the second period.

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Central planner’s expenditure and dynamic Inequality increasing in the expenditure ratio leads to increasing in the efficiency ratio, in the other word, skilled biased technology progress. increasing in the efficiency ratio results in increasing in inequality.

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Remind that the elasticity is defined as follow where is labor proportion elasticity of relative wage in the period A change in the labor proportion and dynamic inequality

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For the first period, This implies that relative disposable wage is not affected by a small change in labor proportion. This result aligns with the prediction in Factor Price Insensitivity Lemma (Feenstra, 2003).

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A change in the labor proportion and dynamic inequality For the second period, the derivative of the relative wage with respective the labor proportion in the second period is And,

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A change in the labor proportion and dynamic inequality Since,. Unlike the first period, In the second period, a small increase (decrease) of labor proportion leads to an increase (decrease) of relative wage.

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A change in the labor proportion and dynamic inequality Comparing to the case of unchanged labor proportion, if the labor proportion in the second period increases, central planner will expect that change and sacrifice more budget for promoting efficiency of skilled labors.

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A change in the labor proportion and dynamic inequality Therefore technology is biased to skilled labors in the second period, i.e. the efficiency ratio increases. Increasing of the efficiency ratio leads to increasing of the relative wage in the second, comparing to the case of unchanged labor proportion.

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A change in the labor proportion and dynamic inequality After integrating all implication in both previous and this section, the dynamic inequality under changing of the labor proportion can be conclusion as follows. When labor proportion increase (decrease) from in the first period to in the second period, (1)if the labor proportion in the first period is more (less) than the critical value, inequality in the second period will increase (decrease) from the first period more extremely than the case of unchanged labor proportion (1)if the labor proportion in the first period is more (less) than the critical value, inequality in the second period will increase (decrease) from the first period more extremely than the case of unchanged labor proportion

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A change in the labor proportion and dynamic inequality (2) if the labor proportion in the first period less (more) than the critical value (2.1) if the labor proportion in the second period is still less (more) than the critical value, inequality in the second period will still decrease (increase) from the first period but decreasing (increasing) will be less extreme than the case of unchanged labor proportion (2.2) if the labor proportion in the second period is more (than) than the critical value, inequality in the second period will increase (decrease) from the first period

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A change in the relative world price and dynamic inequality A change in the relative world price and dynamic inequality the elasticity is defined as where is relative world price elasticity of relative wage in the period,.

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A change in the relative world price and dynamic inequality For the first period, This study has already proved that

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A change in the relative world price and dynamic inequality We can conclude that, in the first period, the relative wage increases (decreases) more rapidly than small decreasing (increasing) of the relative world prices. This conclusion is identical to the prediction in Stolper-Samuelson theorem. economy produces more goods X and less goods Y when relative world price increases.

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A change in the relative world price and dynamic inequality Since goods X is unskilled labor intensive while goods Y is skilled labor intensive, producers need more unskilled labors but less skilled labors. Then real skilled labor wages decreases, but real unskilled labor wages increases The relative wage in the first period decrease in consequence.

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A change in the relative world price and dynamic inequality For the second period, the derivative of the relative wage with respective the relative world price in the second period is

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A change in the relative world price and dynamic inequality Therefore, Since, we can conclude that

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A change in the relative world price and dynamic inequality This means that, if the relative world price increases (decreases) by the same small percentage, the relative wage in the second period will decreases (increases) more rapidly than the relative wage in the first period.

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A change in the relative world price and dynamic inequality For explanation, when the technology level is fixed, mechanism of impact on the relative wage can be explained by the mechanism in Stolper-Samuelson theorem. But, in the second period when there is technology progress, Stolper-Samuelson’s mechanism is reinforced through skilled- biased technological progress.

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A change in the relative world price and dynamic inequality Increasing of relative world price could be previously expected by central planner in the first period. To increase output of X for maximizing pDNI, central planner expended more for promoting efficiency of unskilled labors relative to skilled labors in the past and, in present period, technology is biased to unskilled labors in consequence.

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A change in the relative world price and dynamic inequality Unskilled biased technology results in decreasing in the relative wage. Since impact from Stolper-Samuelson’s mechanism and impact skilled biased technological progress have the same direction, the relative world price affects relative wage in the second period more extremely than the first period.

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A change in the relative world price and dynamic inequality After integrating all of conclusion from this and previous sections, the dynamic inequality under changing of the relative world price can be conclusion as follows. (1)When the relative world price in the first period slightly decreases (increases), inequality the first period increases (decreases) but inequality in the second period is the same as the case of unchanged relative world price.

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A change in the relative world price and dynamic inequality (2)When the relative world price in the second period slightly decreases (increases), (2.1) if the labor proportion in the second period is more (less) than the critical value, inequality in the second period will increase (decrease) from the first period more extremely than the case of unchanged relative world price. (2.2) if the labor proportion in the second period is less (more) than the critical value, inequality in the second period will still decrease (increase) from the first period but decreasing (increasing) will be less extreme than the case of unchanged relative world price. (2.2) if the labor proportion in the second period is less (more) than the critical value, inequality in the second period will still decrease (increase) from the first period but decreasing (increasing) will be less extreme than the case of unchanged relative world price.

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Implication of changing in inequality Implication 1 Without government as technology promoter, inequality arises from skilled biased technological change, i.e. increasing of efficiency ratio increasing (decreasing) of price of goods which is skilled(unskilled)-labor intensive.

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Implication of changing in inequality Implication 2 Given amount of labors and world prices being equal throughout two periods, under actions of national income maximizing government as technology promoter, government is “inequality creator” if unskilled labors is minority group government is “inequality reducer” if skilled labors is minority group.

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Implication of changing in inequality Implication 3 Under actions of national income maximizing government as technology promoter, any external factors which increases (decreases) unskilled (skilled) labors in the second period can decrease inequality.

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Implication of changing in inequality For example, assume that all immigrants are accepted as citizen by local government. Immigrant permission policy in the long-run will reduce inequality in the second period if there most of immigrants are unskilled labors.

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Implication of changing in inequality Implication 4 Under actions of national income maximizing government as technology promoter, any external shocks through swing in relative price leads to more extreme fluctuation of local relative wage, comparing to the case of without government as technology promoter.

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Implication of changing in inequality Implication 5 Both Increasing (decreasing) of skilled (unskilled) labors and increasing (decreasing) of price of goods which is skilled(unskilled)-labor intensive in the second period will retard government’s inequality reduction but reinforce government’s inequality creation.

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Implication of changing in inequality Implication 6 Under actions of national income maximizing government as technology promoter, any government policies which decrease (increase) of price of goods which is skilled(unskilled)-labor intensive will reduce inequality any government policies which increase (decrease) of price of goods which is skilled(unskilled)-labor intensive will create inequality.

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Implication of changing in inequality For example For imported goods, if government decreases (increases) tariff rate on skilled(unskilled)-labor intensive goods, inequality will be reduce. If government acts oppositely, inequality will be created. if government decreases (increases) commercial tax rate on skilled(unskilled)-labor intensive goods, inequality will be reduce. If government acts oppositely, inequality will be created.

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