Exogenous technological change and wage inequality in rural India: a theoretical note

Abstract

PurposeThe purpose of this paper is to develop a theoretical model to explore the economic consequences of an exogenous skill‐biased technological change.Design/methodology/approachThe paper develops a theoretical model based on assumptions and conditions that replicate those of a government‐sponsored poverty reduction programme in India.FindingsThe paper finds that, under certain stated conditions, wage inequality between artisans with improved toolkits and those without is likely to increase, while, under a different set of conditions, this is likely to decrease.Research limitations/implicationsActual wage inequality implications of specific exogenous skill‐biased technological changes need to be studied to take the theoretical model further.Practical implicationsOne major implication is that, when government help is provided by way of an exogenous skill‐biased technological change to a fraction of workers, it may have the unintended consequence of increasing wage inequality between the beneficiary and the non‐beneficiary workers. In extreme cases, it may even lower the equilibrium wages of the non‐beneficiary workers.Originality/valueThe paper brings out the critical role of efficiency units of workers with skill‐biased technology (artisans with improved toolkits) and those without these in determining the wage inequality between these categories of workers (artisans) based on a theoretical model of the trajectory along which the rural economy moves.