RIETI Report August 2012

Technical Changes Can Reduce Inequalities

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Widening income inequalities and population aging are problems not only for Japan but also for many countries around the world. Senior Fellow Keiichiro Kobayashi claims that the "self-restoring force" of the market economy, a mechanism in which such problems are alleviated by the working of market forces, will be a ray of hope in the future. In the August issue of the RIETI Report, we present Kobayashi's column "Technical Changes Can Reduce Inequalities," originally printed in the Nihon Keizai Shimbun on July 23, 2012.

He discusses the theory of directed technical change (DTC) and the assumption that the direction of technical change is determined by the conditions of the market economy. Kobayashi then introduces the "inequality cycle" to describe the widening and narrowing of the income inequalities, and talks about the effects of income inequalities in Japan and the world in the future. Finally, Kobayashi addresses the DTC theory and its important implications for technological innovation in the area of population aging, a topic which is of concern to Japan.

This month's featured article

Technical Changes Can Reduce Inequalities

KOBAYASHI KeiichiroSenior Fellow

Widening income inequalities and population aging are problems not only for Japan but also for many countries around the world. I would like to examine the "self-restoring force" of the market economy, a mechanism in which such problems are alleviated by the working of market forces, using a long-term time frame spanning several decades. The starting point is the theory of directed technical change (DTC), which has been advocated by Professor Daron Acemoglu of the Massachusetts Institute of Technology (MIT) since the late 1990s.

Income inequalities in advanced countries began to widen in the 1970s. In Japan, this occurred in the 1980s and developed into a major social problem in the 2000s. According to a 2006 paper by MIT Professor David H. Autor and others, polarization of the labor market (see the Keywords section) has been taking place in the United States. However, this trend may not last forever.

To read the full text
http://www.rieti.go.jp/en/papers/contribution/kobayashi/46.html

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