Journal of Economic Growth

, Volume 7, Issue 2, pp 117–136 | Cite as

The Division of Labor, Inequality and Growth

  • Arthur Fishman
  • Avi Simhon
Article

Abstract

We present a model that links the division of labor and economic growth with the division of wealth in society. When capital market imperfections restrict the access of poor households to capital, the division of wealth affects individual incentives to invest in specialization. In turn, the division of labor determines the dynamics of the wealth distribution. A highly concentrated distribution of wealth leads to a low degree of specialization, low productivity, and low wages. In that case workers are unable to accumulate enough wealth to invest in specialization. Hence, in a highly unequal society, there is a vicious cycle in which the degree of specialization, productivity and wages stay low, wealth and income inequality stays high and the economy stagnates. By contrast, greater equality increases investment in specialization and leads to a greater division of labor and higher long run development.

division of labor income equality growth 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Aghion, P., and P. Bolton. (1997). “A Theory of Trickle Down Growth and Development,” Review of Economic Studies 64, 151–172.Google Scholar
  2. Aghion, P., E. Caroli, and C. Garcia-Penalosa. (1999). “Inequality and Economic Growth: The Perspective of the New Growth Theories,” Journal of Economic Literature 37, 1615–1660.Google Scholar
  3. Atkinson, A., and M. Ogaki. (1996). “Wealth-Varying Intertemporal Elasticities of Substitution: Evidence from Panel and Aggregate Data,” Journal of Monetary Economics 38, 507–534.Google Scholar
  4. Baldwin, R. E., P. Martin, and G. I. P. Ottaviano. (2001). “Global Income Divergence, Trade and Industrialization: The Geography of Growth Take-Offs,” Journal of Economic Growth, 6, 5–37.Google Scholar
  5. Banerjee, A., and A. Newman. (1993). “Occupational Choice and the Process of Development,” Journal of Political Economy 101, 274–298.Google Scholar
  6. Barro, R. (2000). “Inequality and Growth in a Panel of Countries,” Journal of Economic Growth 5, 5–32.Google Scholar
  7. Becker, G. S., and K. M. Murphy. (1992). “The Division of Labor, Coordination Costs and Knowledge,” Quarterly Journal of Economics 107, 1137–1160.Google Scholar
  8. Benabou, R. (1996). “Inequality and Growth.” NBER Macroeconomics Annual. MIT Press, pp. 11–74.Google Scholar
  9. Bourguignon, F. (1981). “Pareto Superiority of Unegalitarian Equilibria in Stiglitz's Model of Wealth Distribution with Convex Saving Function,” Econometrica 49(6), 1469–1475.Google Scholar
  10. Dynan, K. E., J. Skinner, and S. Zeldes. (1996). “Do the rich save more?” Mimeo.Google Scholar
  11. Fershtman, C., and E. Kalai. (1993). “Complexity Considerations and Market Behavior,” Rand Journal of Economics 24(2), 224–235.Google Scholar
  12. Forbes, K. (2000). “A Reassessment of the Relationship Between Inequality and Growth,” American Economic Review 90, 869–887.Google Scholar
  13. Galor, O., and O. Moav. (1999). “From Physical to Human Capital Accumulation: Inequality in the Process of Development,” CEPR discusion paper #2307.Google Scholar
  14. Galor, O., and J. Zeira. (1993). “Income Distribution and Macroeconomics,” Review of Economic Studies 60, 35–52.Google Scholar
  15. Goodfriend, M., and J. McDermott. (1995). “Early Development,” American Economic Review 85, 116–133.Google Scholar
  16. Helpman, E., and G. Grossman. (1993). Innovation and Growth in the Global Economy. MIT Press.Google Scholar
  17. Kaldor, N. (1956). “Alternative Theories of Distribution,” Review of Economic Studies 23, 83–100.Google Scholar
  18. Kelly, M. (1997). “The Dynamic of Smithian Growth,” Quarterly Journal of Economics 112, 939–964.Google Scholar
  19. Kelly, M. (2001). “Linkages, Thresholds, and Development,” Journal of Economic Growth 6(1), 39–53.Google Scholar
  20. Keynes, J. M. (1920). The Economic Consequences of the Peace. Macmillan and Co.Google Scholar
  21. Kuznets, S. (1955). “Economic Growth and Income Inequality,” American Economic Review 45, 1–28.Google Scholar
  22. Menchik, P. L., and M. David. (1983). “Income Distribution, Life Time Earnings and Bequests,” American Economic Review 73, 672–690.Google Scholar
  23. Moav, O. (2002). “Income Distribution and Macroeconomics: The Persistence of Inequality in a Convex Technology Framework,” Economics Letters 75, 187–192.Google Scholar
  24. Perotti, R. (1996). “Growth, Income Distribution, and Democracy: What the Data Say,” Journal of Economic Growth 1, 149–187.Google Scholar
  25. Piketty, T. (1997). “The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing,” Review of Economic Studies 64, 173–189.Google Scholar
  26. Romer, P. M. (1987). “Growth Based on Increasing Returns Due to Specialization,” American Economic Review 77, 56–62.Google Scholar
  27. Stigler, G. (1951). “The Division of Labor is Limited by the Extent of the Market,” Journal of Political Economy 59, 185–193.Google Scholar
  28. Tomes, N. (1981). “The Family, Inheritance and the Intergenerational Transmission of Inequality,” Journal of Political Economy 89, 928–958.Google Scholar

Copyright information

© Kluwer Academic Publishers 2002

Authors and Affiliations

  • Arthur Fishman
    • 1
  • Avi Simhon
    • 2
  1. 1.Department of EconomicsBar Ilan UniversityIsrael
  2. 2.Hebrew University of JerusalemIsrael

Personalised recommendations