Biased Technical Change, Labor Income Share And The Long-term Evolution Of Income Inequality

For the inverted U-shape hypothesis of secular evolution of income inequality which proposed by Kuznets (1955), the econometric analysis of cross-country data did not reach agreement, and the statistical studies for some typical developed countries along the time axis support the cubic curve of rise-fall-rise again. To prove the Kuznets curve presence or absence can not make policy recommendations of whether government should intervene in the income distribution or not. Understanding the mechanism behind the evolution pattern of income inequality is important for us to have an accurate prediction and to reduce the income inequality. The question this paper want to answer are that, what is the driving force behind the secular evolution pattern of income inequality? and how the bias of technical change impact the two aspects of income inequality(factor income share and wage inequality) in pure market economy? In this paper, based on the theory of Aghion's general purpose technology (GPT) and Acemoglu's skill-biased technical change, we try to explain the mechanism of secular evolution pattern of income inequality by technical change, and do econometric analysis of the impact of technical change on labor income share and skill premium with China's data.First, this paper reviews literature and study economic history around the issue of whether the Kuznets curve exists or not. We confirm that the secular evolution pattern of income inequality is cubic curve. From economic history we find that the first rise and decrease of income inequality have a greater relationship with the decline and rise in labor income share, and the second rise of income inequality is associated with wage inequality. Secondly, this paper try to illustrate the mechanism of how biased technical change lead to the secular evolution pattern of income inequality using mathematical models from the definition of technical change. This paper argues that, the capital-biased technical change of industrialization period will increase the marginal productivity of capital relative to labor. In the early period of technology shock, firms increase the relative demand for capital, then capital income share increases and labor income share falls. With the technology gradual spread, capital accumulation accelerates. Then the relative scarcity of capital and labor changes, labor income share increases. The key point of how capital-biased technical change affecting labor income share lies in the relative growth rate of capital-biased technical change and per capita capital stock. The skill-biased technical change of information technology revolution will increase the marginal productivity of skill labor relative to unskilled labor. In the early period of technology shock, firms increase the relative demand for skill labor, skill premium increase. With the technology gradual spread, the speed of unskilled labor transform into skill labor becomes faster, the relative scarcity of skilled labor and unskilled labor changes, skill premium declines. The key point of how skill-biased technical change affecting skill premium lies in the relative growth rate of skill-biased technical change and relative supply of skilled labor. Then, this paper measures the bias of technical change of China, and does econometric analysis for the impact of technical change on labor income share and skill premium based on China's data. We obtain the following basic results:First, the technical change in China is biased for capital; second, technical change which is measured by TFP reduces labor income share; Third, technical change which is measured by TFP reduces skill premium, that means China's technical change is unskilled-biased. Finally, some policy recommendations proposed based on the research conclusions. We suggest that government should do some things, and leave some things undone. There are four possible innovations:First, this paper's largest marginal contribution may be tending the explanation for income inequality by biased technical change to the industrial revolution, using biased technical change to explain the whole secular evolution pattern of income inequality. Second, from the definition of biased technical change, this paper tries to build theoretical model for the mechanism of how capital-biased technical change impact labor income share. We find it is the relative change rate of capital-biased technical change and per capita capital stock that determines the volatility of labor income share. Third, this paper use China's data to study the impact of biased technical change on labor income share and skill premium, and draw some useful conclusions. Forth, this paper measures the bias of technical change in China, the conclusion is that technical change in China is biased for capital regardless of using Harold or Hicks's definition.