Technology Policy and Wage Inequality

In this paper we argue that government procurement policy played a role in stimulating the wave of innovation that hit the US economy in the 1980s, as well as the simultaneous increase in inequality and in education attainment. Since the early 1980s U.S. policy makers began targeting commercial innovations more directly and explicitly. We focus on the shift in the composition of public demand towards high-tech goods which, by increasing the market-size of innovative rms, functions as a de-facto innovation policy tool. We build a quality-ladders non-scale growth model with heterogeneous industries and endogenous supply of skills, and show both theoretically and empirically that increases in the technological content of public spending stimulates R&D, raises the wage of skilled workers and, at the same time, stimulates human capital accumulation. A calibrated version of the model suggests that government policy explains up to 32 percent of the observed increase in wage inequality in the period 1978-91.