DP3596 Vintage Capital as an Origin of Inequalities

Author(s): Andreas Hornstein, Per Krusell, Giovanni L. Violante
Publication Date: October 2002
Keyword(s): labour share, unemployment, vacancy heterogeneity, vintage capital, wage inequality
JEL(s): J31, J64
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3596

Does capital-embodied technological change play an important role in shaping labour market inequalities? This Paper addresses the question in a model with vintage capital and search/matching frictions where costly capital investment leads to large heterogeneity in productivity among vacancies in equilibrium. The Paper first demonstrates analytically how both technology growth and institutional variables affect equilibrium wage inequality, income shares and unemployment. Next, it applies the model to a quantitative evaluation of capital as an origin of wage inequality: at the current rate of embodied productivity growth a 10-year vintage differential in capital translates into a 6% wage gap. The model also allows a US – Continental Europe comparison: an embodied technological acceleration interacted with different labour market institutions can explain a significant part of the differential rise in unemployment and capital share and some of the differential dynamics in wage inequality.