PRODUCTIVITY DIFFERENCES: Introduction 2

Our model gives a simple expression for output per worker as a function of the ratio of capital per worker, ratio of skilled to unskilled workers, and the equilibrium skill-bias in the North’s technology. By considering the U.S. as the North, we perform some back-of-the-envelope calculations. These exercises suggest that the differences predicted by our model are sizeable, and significantly larger than those predicted by a simple “neoclassical” model. More concretely, for example, using cross-country variations in physical and human capital (secondary school attainment), we find that the neo-classical model predicts, on average, that output per worker in the LDCs should be approximately 40% of the U.S.

while our model predicts the same number to be 23%, much closer to the 21% number we observe in the data. Moreover, our calculations suggest that if technologies were not biased towards the needs of the U.S. economy, output per worker differences would be much smaller. For example, when technologies are appropriate to the needs of the “average” country in our sample, predicted differences in output per worker axe reduced by a factor of more than two.

A number of other interesting results also follow from of our analysis. First, the LDCs are predicted to have productivity levels comparable to the OECD countries in very unskilled and very skilled sectors and tasks, but lower productivity in medium skilled tasks. In the most complex tasks, even the very skill-scarce LDCs have to employ skilled workers, who will use the skill-complementary technologies developed in the North and achieve a high level of productivity. In contrast, there will be large productivity differences in sectors where workers axe skilled in the North but unskilled in the South, because the technologies are not developed for the unskilled workers in these sectors. This pattern receives some support from the casual observation that there are pockets of efficient high-tech industries such as software programming in India. add comment

Second, we show that international trade reduces productivity differences because the LDCs specialize in sectors where technology is appropriate to unskilled workers. Interestingly, despite reducing productivity differences, international trade causes divergence in output per worker. Trade reduces the prices of unskilled goods in the North, and discourages investment in unskilled technologies, which were those most beneficial to the South.

As a result, trade increases the relative productivity and pay of skilled workers, and widens the output gap between poor and rich countries. Although other, beneficial, effects of international trade may be more important in practice, this novel effect of trade on per capita income in the South, via its impact on the skill-bias of new technologies, is also worth bearing in mind.

Third, intellectual property rights emerge as an important determinant of technological development.