Essays on Inequality and Productivity Growth Decomposition

In this dissertation I analyze the effect of globalization on income inequality and aggregate productivity growth. In the first two chapters I develop a theoretical model to study the effect of international trade and foreign direct investments (FDI) on income inequality. In the model firms with heterogeneous productivity levels hire homogenous workers. The central feature of the model is the rent-sharing mechanism, by which firms share part of their profits with employees. As a result, income varies across workers because more productive firms pay more to their workers.

In the first chapter, I focus on the case when all countries are symmetric in their aggregate productivity levels. I find that increased openness to trade increases welfare and at the same time reduces income inequality. At the same time, policies that facilitate FDI, although increase welfare, also lead to greater inequality. I also find that technological progress can result in higher inequality.

In the second chapter I extend the model to asymmetric countries, in which one country (North) has greater aggregate productivity than the other country (South). As the two countries liberalize trade, both countries would observe a reduction in inequality, although the reduction is greater in the North and the income inequality differential between the two countries decreases. A unilateral tariff reduction by the South has a similar effect, but North is better off setting lower tariff as it observes lowest inequality compare to other cases.

The third chapter analyzes aggregate productivity growth in Chilean manufacturing industry during 1979-96. I first decompose the aggregate growth into three major components: the inter-industry effect, whereby aggregate productivity increases due to expansion of the most productive industries; the intra-industry effect, whereby aggregate productivity increase due to expansion of the most productive firms within an industry; the technological effect, which reflects a symmetric increase in aggregate productivity across all firms and industries. I then estimate the contribution of each of these channels to Chilean aggregate productivity growth and find that technological progress was the major factor of the rapid aggregate productivity growth in Chile, while the contribution of inter-industry and intra-industry effects was minimal.