The O-Ring Sector and the Foolproof Sector: An Explanation for Cross-Country Income Differences

32 Pages Posted: 30 Nov 2009

See all articles by Garett Jones

Garett Jones

George Mason University - Department of Economics; George Mason University - Mercatus Center

Date Written: 2009

Abstract

Differences in worker skill cause modest differences in wages within a country, but are associated with massive differences in productivity across countries (Hanushek and Kimko, 2000). I build upon Kremer’s (1993) O-ring theory of production to explain this stylized fact. I posit that there are two kinds of jobs: O-ring jobs where strategic complementarities to skill are large, and a diminishing-returns Foolproof sector, where two mediocre workers provide the same effective labor as one excellent worker. In equilibrium, an econometrician would only see small returns to skill within a country. In a world where countries vary only slightly in the average skill of workers, these assumptions are sufficient to generate massive differences in cross-country income inequality while generating only small amounts of intra-country income inequality. Implications for immigration policy, dual labor market theory, and border regions are discussed.

Suggested Citation

Jones, Garett, The O-Ring Sector and the Foolproof Sector: An Explanation for Cross-Country Income Differences (2009). GMU Working Paper in Economics No. 09-04, Available at SSRN: https://ssrn.com/abstract=1515857 or http://dx.doi.org/10.2139/ssrn.1515857

Garett Jones (Contact Author)

George Mason University - Department of Economics ( email )

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HOME PAGE: http://economics.gmu.edu/people/gjonesb

George Mason University - Mercatus Center ( email )

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