Does a Rising Tide Lift All Boats? Welfare Consequences of Asymmetric Growth

A common presumption in macroeconomics and development economics is that increased growth in the aggregate enhances welfare for everyone in the economy. I show that instead, if the underlying growth is a productivity increase in the sector consumed primarily by one group, the welfare of a second group may fall. I demonstrate this effect in two cases. In the first case, skill-biased technological change in sectors consumed by the skilled rich increases their income beyond the increase in economic wealth, causing a decline in the consumption and welfare of the low-skilled poor. This result stands in contrast to the standard model of skillbiased technological change. The second case examines trade between two countries, and demonstrates circumstances under which an increase in productivity in the nontradable sector of one country causes a welfare decline for the other country. The paper discusses evidence in support of the effects in both cases. This analysis demonstrates that a rising tide need not lift all boats and that the precise nature of consumption patterns is important for welfare.