Endogeneous Structural Change in General Equilibrium

Abstract

We study the evolution of income and wealth inequality in an economy
undergoing endogenous structural change with imperfect labor mobility. Our
economy features two sectors: services and manufacturing. With faster TFP
growth in manufacturing, labor reallocates from manufacturing to services. This
reallocation is slower due to labor mobility frictions, which in turn, raises relative
wages in services. As a result, income inequality is higher. Moreover, we study
the impact of structural change on wealth inequality. Its economic intuition
is more ambiguous. On the one hand, increased income dispersion implies
increased dispersion in the ability to accumulate wealth across individuals. On
the other hand, younger workers who hold the least assets are the most mobile
across sectors. Their incomes are improved, which boosts their savings, which
works towards equalizing wealth distribution. The consequence of these changes
can only be verified with a computational model. To this end, we construct an
overlapping generations model with two sectors: manufacturing and services.
Our model also features heterogeneous individuals. With our model, we are
able to show how the structural change affected the evolution of income and
wealth inequality in Poland as of 1990.