Income inequality in general equilibrium - Glenn Magerman
Glenn Magerman will be presenting his paper on 'Income inequality in general equilibrium'.
We study the impact of labor misallocation between sectors on economic growth and income inequality in a large class of economic models. We first provide a result for the impact of frictions to workers' mobility in a one sector economy with perfect competition. We show that income inequality impacts negatively economic growth in this simple model and appears under the form of a partial change in the Theil index. Furthermore, we show that this result carries on in all models of economic growth, from the Solow (1957) model to the latest production network models. Next, we endogenize the frictions to workers' mobility using of a Roy-Fréchet setup between sectors in a production network economy. The framework accommodates sectoral input-output linkages, arbitrary elasticities of factors and intermediates, and heterogeneous workers that endogenously choose to supply their labor across sectors. We characterize the impact of Harrod-neutral productivity shocks and changes in labor mobility on income inequality and real GDP. Inequality arises in equilibrium due to a combination of changes in income share and labor use across all sectors due to their dependencies in the input-output network. Our results suggest that labor market-improving policies can have strong effects on both real GDP and inequality, but the impact is qualitatively dependent on the structure of the economy and its initial equilibrium.