## ABSOLUTE POVERTY OR RELATIVE INEQUALITY: A THEORY OF GROWTH AND WAGE DIFFERENTIALS

## Nuffield College, Oxford University

### 22 May 1995

Abstract

This paper has two main aims. On the other hand, it provides an endogenous growth model in which there are multiple steady-state growth paths. On the other, it examines how the various growth rates imply different degrees of wage inequality. The analysis provides a possible explanation for the evolution of the skill premium in many of the developed countries in recent years. The model makes two crucial assumptions. Firstly, that there are different degrees of complementarity between technical change and the two types of labour, skilled and unskilled. This means that technical progress is not neutral and affects the marginal products of the two types of labour in different ways. Growth, therefore, increases the wage ratio. Secondly, minimum level of researchers is employed by the sector. There are thus two possible stable steady states: a low-growth/low-inequality one and a high-growth/high-inequality one. We then examine various policies aimed at promoting growth, and analyze how they have different implications for wage inequality