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

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

2. 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.

3. 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.

4. 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

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

6. 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.

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

8. 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

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

10. 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 • There are 2 factor; skilled labors, H, and unskilled labors, L, whose wages at rate and

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

12. The set up • production function of X and Y

13. 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

14. 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 .

15. 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.

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

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

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

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

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

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

22. 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,

23. 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.

24. 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

25. 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.

26. The production side Equilibrium wages and outputs

27. The production side Equilibrium wages and outputs

28. 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.

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

30. 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.

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

32. Consumer side • The equilibrium consumption in the first period are

33. Consumer side • And the equilibrium consumption in the second period are

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

35. GDP , DNI and pDNI of Economy

36. GDP , DNI and pDNI of Economy • 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

37. 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.

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

39. Central planner’s problem The equilibrium expenditure are

40. Central planner’s problem • the equilibrium tax rate is

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

42. 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.

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

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

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

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

47. 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.

48. 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

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

50. 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.