Vintage Capital as an Origin of Inequalities

66 Pages Posted: 14 Jul 2003

See all articles by Andreas Hornstein

Andreas Hornstein

Federal Reserve Bank of Richmond

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Giovanni L. Violante

New York University, Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 2002

Abstract

Does capital-embodied technological change play an important role in shaping labour market inequalities? This Paper addresses the question in a model with vintage capital and search/matching frictions where costly capital investment leads to large heterogeneity in productivity among vacancies in equilibrium. The Paper first demonstrates analytically how both technology growth and institutional variables affect equilibrium wage inequality, income shares and unemployment. Next, it applies the model to a quantitative evaluation of capital as an origin of wage inequality: at the current rate of embodied productivity growth a 10-year vintage differential in capital translates into a 6% wage gap. The model also allows a US-Continental Europe comparison: an embodied technological acceleration interacted with different labour market institutions can explain a significant part of the differential rise in unemployment and capital share and some of the differential dynamics in wage inequality.

Keywords: Vintage capital, wage inequality, unemployment, labour share, vacancy heterogeneity

JEL Classification: J31, J64

Suggested Citation

Hornstein, Andreas and Krusell, Per L. and Violante, Giovanni L., Vintage Capital as an Origin of Inequalities (October 2002). CEPR Discussion Paper No. 3596. Available at SSRN: https://ssrn.com/abstract=353744

Andreas Hornstein

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

Per L. Krusell (Contact Author)

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ
United States
609-258-4003 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 0 8 16 30 73 (Phone)
+46 0 8 16 41 77 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giovanni L. Violante

New York University, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-992-9771 (Phone)
212-995-4186 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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