Distribution and Growth in an Economy with Limited Needs

Gilles Saint-Paul

No 273, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper studies a model of the distribution of income under bounded needs. Utility derived from any given good reaches a bliss point at a finite consumption level of that good. On the other hand, introducing new varieties always increases utility. It is assumed that each variety is owned by a monopoly. Workers can specialize in material goods production or in the knowledge sector, which designs new varieties. It is shown that if the elasticity of labor supply to the knowledge sector is bounded, as productivity increases, the economy moves from a “Solovian zone” where wages increase with productivity, to a “Marxian” zone where the paradoxically decline with productivity. This is because as consumption of a given good increases, the price elasticity of demand falls, and markups increase to infinity as consumption reaches the unit elasticity point. Such a point typically exists because of the finiteness of needs. It is also shown that if individual creativity is more unevenly distributed then productivity, technical progress always increases inequality. Redistribution from profits to workers in the production sector always benefits arbitrarily poor workers regardless of their distortionary effect on the number of varieties, because diversity is not valued by very poor agents. In contrast, rich agents close enough to their bliss point can only be made better-off by an increase in diversity. If wages are set by monopoly unions rather than set competitively, they are proportional to productivity and the Marxian zone no longer exists. But technical progress always reduces employment in the material goods sector. International trade may reduce wages in poor countries and increase them in rich countries if under autarky the former consume less of each good that the latter.

Keywords: technical change; Research and Development; economic growth; innovation; knowledge economy; Income distribution; wages (search for similar items in EconPapers)
JEL-codes: D3 D42 E11 E24 E25 F12 F15 J31 L12 O14 O15 O3 O41 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2001-03
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (2)

Published - published in: Economic Journal, 2006, 116 (511), 382-407

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Related works:
Working Paper: Distribution and Growth in an Economy with Limited Needs (2001)
Working Paper: Distribution and Growth in an Economy with Limited Needs (2001)
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