Abstract:
This paper examines the influence of consumers’ tastes on the development of hi-tech sectors and inter-sector wage inequality. The analysis is performed by using a general equilibrium model with monopolistic competition in hi-tech sectors and perfect competition in a traditional sector. Hi-tech sectors are horizontally differentiated with respect to labor skills required by production technologies and to efficiency of these technologies. Motivated by larger wages, workers intend to work in hi-tech sectors but face a risk to be unemployed. Unemployment appears as a consequence of job market frictions: rejected skilled workers fail to find a new job immediately. We posit that an increase of spending for hi-tech goods primary affects the diversity of the supply: the number of firms operated in hi-tech sectors goes up. An expansion of hi-tech sectors a priori can occur in two alternative ways. The first way is described by a more competitive monopolistic competition: each firm decreases its prices and increases the output. Then the expansion of sectors occurs at firm as well as at sector levels. This requires an excessive inflow of workers. Taking into account pressure of unemployment agents, employed workers accept incomes that follow prices until the job in hi-tech is more compensated in the standard sector. As a result, the income inequality goes down. The second opportunity strengthens the monopolistic nature of the monopolistic competition. The equilibrium variables listed above move in the opposite direction. Our paper suggests that an economy “chooses” its response to a shift in consumer tastes depending on consumers’ elasticity of substitution between hi-tech goods in such a manner that an increasing elasticity leads to a more competitive monopolistic competition, and vice versa. The intuition underlying this result is rather simple. Spending additional money for specific goods, consumers exhibit a more elastic demand. The latter follows a growth/decline in demand for specific goods if is increasing/decreasing. According to Zhelobodko el al (2012), economies characterized by an increasing/decreasing, weaken/strengthen the competition in hi-tech sectors under exogenous shocks that relax trade barriers. We argue that those economies exhibit the opposite changes in the competition when the expansion of hi-tech sectors is driven by the preferences of consumers.
In our model, changes in the wage inequality are explored as a size effect, which is washed out under preferences with constant elasticity of substitution. Following Zhelobodko el al (2012), we consider preferences with relatively small variability. Nevertheless, the response of the wage inequality to a shift in tastes can be large. The scale of the response depends on the efficiency of technologies in the corresponding industries, whose model proxy is the ratio of fixed to variable costs faced by firms. Changing in preferences involving goods that are produced by industries with higher values of affects the inter-industry wage inequality stronger.