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Maté Fodor, ECARES Print
Friday, 11 May 2012, 12:15 - 13:15

Maté Fodor, ECARES


The Trilemma Revisited: Institutions, Inequality and Employment Creation in an era of ICT-intensive Service Expansion


The era of de-industrialization brought about a three-way choice between the policy goals of employment creation, equality and budgetary restraint. This phenomenon was documented as the Trilemma of the service sector economy. Expansion in private employment in services was likely to require higher levels of flexibility in wage setting procedures at the bottom end of the earnings distribution, and higher rates of wage inequality. Public service sector expansion, on the other hand, came with its own distributional cost in terms of higher levels of government spending implying, ceteris paribus, higher levels of taxation and/or government deficits. However, due to the ICT revolution and the increased tradability of services, we argue that the constraints on policy making may not be as tight as previously understood. We show that the possibility exists for high productivity, internationally traded service sectors to become the dynamic drivers of employment expansion in the post industrial economy, reducing the need to rely on low relative wages for private service employment expansion. We find that flexibility in wage setting and inequality at the top end of the earnings distribution appears to facilitate employment creation in dynamic service sectors. We suggest that this relationship is closely related to the incentives for skill acquisition and innovation which are created when the wages of highly skilled workers are allowed to deviate from the average. With more compressed wage structures, public educational investment acts as an effective substitute for private investment. Consequently, we show that a new Trilemma emerges, albeit one in which the distributional trade-offs are not quite as stark as previously established.

Location: R42.2.113
Contact: Claude Adan, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it