Government spending composition, technical change and wage inequality



prevents a more complete evaluation of the magnitude of the policy effects on wages. Lacking data on
the technological composition of aggregate government procurement, in our empirical analyses we have
used the only available sub-sample: the composition of government investment. Despite the support
for our theory provided by such data, a larger sample of government procurement would certainly
refine the results. Hence, some effort could be devoted to the collection of data on the composition of
public consumption between high-tech and low-tech sectors; this would allow for a better quantitative
assessment of our demand-side policy channel.

A second line of future research would involve a more complete investigation of the policy channel
by explicitly modeling the supply-side innovation policy tools introduced in the 1980s and discussed
in section 2, together with the demand-side policy explored in this paper, and evaluate the overall
effect of these policies on the factor bias of technical change and on wage inequality. Impullitti (2008b)
shows that a major obstacle in this direction of research is the difficulty of quantifying the economic
magnitude of the supply-side policies.

The theoretical link between the composition of government spending and long-run growth is of
some interest in itself - besides the implications for wage inequality explored here - and worth of
further research. The paper highlights a mechanism of
revenue-neutral selective growth policy that
can be relevant for recent policy debates, especially in those countries that, burdened by large public
debt, wish to stimulate growth without using deficit spending. For instance, low-cost growth policies
have recently played a central role in the debate on the implementation of the Lisbon Agenda in the
E.U.. (see Sapir 2003). The existing papers tackling the effect of the composition of public spending on
growth focus on different dimensions of spending composition, such as public goods versus transfers,
but cannot focus on the sectorial composition because they use models with homogeneous industries
(i.e. Peretto, 2003, and 2007). In the companion paper, Cozzi and Impullitti (2008), we complement
the existing literature using our model to analyze the interaction between the composition of fiscal
policy (taxes and spending) and the asymmetric-industry structure, exploring the implications for
growth. In both the semi-endogenous and the fully-endogenous growth framework we analyze how
fiscal policy can be used to select the most dynamic industries and promote growth.

9 Appendix I: proofs

Proof of the existence of the steady state. Solving (18) for x (ω) and integrating it w.r.t. ω we
get:

x = h ( I—γ^^----г [(θo - ω)(γ 1 - 1) + (G - ω^                    (A1)

(ρ + n∕μ n) l                            j

and substituting this into (19) we obtain the following synthetic equilibrium condition:

(θ0 + 1 - 2γ) (1 - θ0) ф/2 = ---/ ɪ—τ~θ----ʌ [(θ0 - ω (r 1 - 1) + (G - ω^ .        (A.1.1)

μσ(ρ + n∕μ n) l                           j

The LHS of this eq. (A11) is a strictly concave quadratic polynomial with roots on 2γ 1 and 1,
and the RHS of eq. (A11) is a strictly convex quadratic polynomial with roots
γ and ω-ΓG. It follows

21



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