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

A common presumption is that increased growth in the aggregate enhances the welfare of both the rich and the poor. I show that instead, as the rich get richer, the welfare of the poor may decline if the underlying growth is asymmetric. There are two distinct and complementary explanations: First, sector-biased, skill-biased technological change, and second, efficiency improvements in the government sector. 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 skill-biased technological change. In the second case, growth takes the form of improved efficiency in a government sector that is financed by rich taxpayers. The welfare of the low-skilled poor will decline whenever the consumption bundle of the skilled rich embodies more skill intensity than does the production of government services. This analysis demonstrates that a rising tide need not lift all boats and that the exact nature of consumption patterns is important not only for growth and inequality, as has been emphasized in earlier literature, but also for welfare.