Working Paper: CEPR ID: DP862
Authors: Dani Rodrik
Abstract: Poor countries must specialize in standardized, labour-intensive commodities. Middle-income countries may have a richer menu of options available to them if their labour force is reasonably well-educated and skilled. This paper is motivated by the possibility that there may exist multiple specialization patterns for countries of the second type. What creates the multiplicity of equilibria is a coordination problem inherent in high-tech activities. It is assumed that high-tech production requires a range of differentiated intermediate inputs that are non-tradable. For the high-tech sector to become viable, a sufficiently large number of intermediates has to be produced domestically. But if none is currently being produced, there is little incentive for any single firm to do so on its own. The economy may get stuck in a low-wage, low-tech equilibrium -- even though the high-tech sector is viable. As long as the high-tech sector is more capital-intensive than the low-tech sector, a high-wage policy would stimulate the high-tech sector and be welfare-enhancing.
Keywords: wage policy; trade strategy; technology
JEL Codes: F12; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low-wage policy (J38) | crowd out medium and high-tech sectors (O14) |
| low-wage policy (J38) | low-wage, low-tech equilibrium (F16) |
| high minimum wage (J38) | entry into high-tech sector (L63) |
| entry into high-tech sector (L63) | new equilibrium characterized by higher real income (D59) |
| high-wage policy (J38) | self-sustaining high-tech sector (O39) |
| transition to new equilibrium (D50) | temporarily high wages (J39) |
| temporarily high wages (J39) | initial unemployment (J64) |
| initial unemployment (J64) | better long-term outcomes (I12) |
| high-wage policy (J38) | full employment in high-tech sector (J68) |
| wage policies (J38) | sectoral specialization (L52) |
| wage policies (J38) | overall economic equilibrium (D59) |