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Developing countries rely on technology created by developed countries. This paper shows using model and data that the dependence of developing countries on technology made by developed countries increase wage inequality but leads to higher production in developing countries. I study a Brazilian innovation program that taxed the leasing of international technology to subsidize innovation. Exploiting heterogeneous exposure, I show that the innovation program led firms to replace technology licensed from developed countries by in-house innovations. The replacement of international technology by national technology led to a decline in employment and in the share of high-skilled workers in the firm. I explain these facts with a model of directed technological change and cross-country technology transactions. Firms in a developing country can either innovate or lease technology from a developed country. These two technologies endogenously differ in productivity and skill bias due to factor supply differences in the two countries. I show that the difference in skill bias and productivity can be identified with closed-form solutions by the effect of the innovation program on the firm’s expenditure share and employment. Calibrating the model to reproduce these elasticities, I find that increasing the share of firms patenting in Brazil by 1 p.p. decreases the skilled wage premium by 0.02% and production by 0.2%.

Minneapolis Fed Junior Scholar Conference, Capital Theory (UChicago), Applied Micro Lunch (Uchicago), Trade Workshop (UChicago), Industrial Organization Lunch (UChicago), Development Workshop (UChicago), Nova SBE, CEMFI, HKU, University of Toronto, National University of Singapore, PUC-RJ, Insper, Harvard, Clemson, CREI, EIEF, Yale, DISES – CSEF, Brown University, Richmond FED, Federal Reserve Board, Chicago FED, Dallas FED, NY FED, Stockholm University – IIES, Queen Mary University, Applied Young Economist Webinar, Tilburg Growth Conference, CERGE-EI, GEP/CEPR Conference, BI Norwegian Business School

Prize: RIEF best paper prize (2022)

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I study the effect of an innovation subsidy on the growth of firms in a developing country. Using administrative microdata for Brazil and difference-in-differences, I find that innovation subsidies drive firm growth by facilitating firm entry into high-tariff markets with domestically produced versions of foreign goods. After receiving an innovation subsidy, firms issue more patents, expand their workforce, and diversify their product line. However, these patents receive minimal citations, while also heavily citing foreign patents. Firms increase imports of foreign inputs and expand their product line towards products with high import tariff. Despite that, in the most conservative estimate, every $1 of innovation subsidy generated $10 in present value wages.

robots, jobs, tools

What is the effect of robots and tools on employment and inequality? Using natural language processing and an instrumental variable approach, we discover that robots have led to a sizable decrease in the employment and wages of low-skill workers in operational occupations. However, tools — machines that complement labor — have led to an equally large reinstatement of these workers, increasing their employment and wages. Using a quantitative model, we find that the lower prices of robots and tools over the last 20 years have reduced inequality and increased welfare without a significant effect on employment.

What are the quantitatively relevant determinants of redistribution? I describe a structural method to identify different channels affecting the social choice of redistribution and estimate the counter-factual effect of institutional reforms. The method relies on a dynamic heterogeneous agents model estimated using micro-data on voting and on the support for redistribution. I found that pecuniary gains play a negligible role in shaping redistribution. Voters who could benefit from redistribution support and vote for low transfers motivated by social preferences and not pecuniary gains. Because social preferences are more important than income in predicting support for redistribution, increasing voter turnout or capping campaign contributions would have no effect on redistribution.

Capital Theory (UChicago), Crossing Disciplinary Boundaries in the Social Sciences Workshop, IIES Brown Bag, CSEF, Nottingham University, CESinfo Public Economics

Can anti-dumping tariffs increase employment? To answer this question we compile data on all anti-dumping (AD) investigations in Brazil, which we match to firm-level administrative employment information. Using difference-in-differences, we estimate the effect of AD tariffs on trade, the protected national suppliers, and the sectors linked to these suppliers. In response to an AD tariff, imports decrease and employment increases in the protected sector. Moreover, downstream firms decrease employment, while upstream ones are not affected. To quantify the aggregate effect of these tariffs, we build a model with international trade, input-output linkages, and labor force participation. The model can reproduce the micro-elasticities we find, as well as the aggregate moments of the Brazilian economy. We show that the Brazilian AD policy increased employment by 0.06%, but they decreased welfare by 2.4%. Using tariffs, the government can increase employment by as much as 2.8%.

Trade Workshop (UChicago), LubraMacro, CREI, KU Leuven,

Trade sanctions are a common instrument of diplomatic retaliation. To guide current and future policy, we ask: What is the most cost-efficient way to impose trade sanctions against Russia? To answer this question, we build a quantitative model of international trade with input-output connections. Sanctioning countries simultaneously choose import tariffs to maximize their income and to minimize Russia’s income, with different weights placed on these objectives. We find, first, that for countries with a small willingness to pay for sanctions against Russia, the most cost-efficient sanction is a uniform, about 20% tariff against all Russian products. Second, if countries are willing to pay at least US$0.7 for each US$1 drop in Russian welfare, an embargo on Russia’s mining and energy products – with tariffs above 50% on other products – is the most cost-efficient policy. Finally, if countries target politically relevant sectors, an embargo against Russia’s mining and energy sector is the cost-efficient policy even when there is a small willingness to pay for sanctions.

disabled workers, Brazil

I study the effect of a quota for disabled workers on the labor market and on welfare. Using a task-based model, I show that the effect of a quota will depend on the productivity of disabled workers and their labor supply elasticity. I estimate the productivity of disabled workers using variation from inspections of the quota. I find that the quota increased the hiring of disabled workers, but it reduced wage and employment of non-disabled workers, suggesting that disabled workers are of low-productivity. I estimate the labor supply elasticity of disabled workers using heterogeneous exposure across regions. I find that the quota increased the wage and labor force participation of disabled workers. Using the model calibrated to the empirical estimates, I find that the quota for disabled workers decreased welfare by 0.33% and forced the government to increase marginal taxes. However, alternatively, a subsidy for disabled workers could increase welfare by 0.29%.

work, job search, research-7157268.jpg

In the US, unemployed workers must satisfy two requirements to receive unemployment insurance (UI): a tenure requirement that stipulates the minimum qualifying work spell and a monetary requirement that determines a past minimum wage. This paper develops a heterogeneous agents model with history-dependent UI benefits in order to quantitatively obtain an optimal UI program design. We first conduct an empirical analysis using the discontinuity of UI rules at state borders and find that both the monetary and the tenure requirement reduce unemployment. The monetary requirement decreases the number of employers and the share of part-time workers, while the tenure requirement has the opposite effect. We then use a quantitative model to rationalize these results. When the tenure requirement is long, workers tend to accept more low paying jobs to become eligible for UI sooner and to protect themselves from risk, while the monetary requirement works conversely. We show that, because it mitigates moral hazard, the monetary requirement can generate higher welfare levels than an increase in the length of the tenure requirement. 

I show that an exogenous increase in the relative income of voters causes an increase in public goods provision, contrary to standard political economy theories. I explain this result with a model of complementarity between consumption and public goods. Estimating the model to reproduce the micro-elasticities, I find that compulsory voting would decrease the government size by 7% despite reducing the average income of voters by 6%.

Papers in Progress

Government Brain Drain

Governments around the world, especially in developing countries, are well known for providing generous benefits and paying extravagant wages.  As a consequence, even high wage private-sector workers could be tempted by a public servant position. Following this intuition, I show using a Roy model that private-sector earnings could go down as a consequence of increases in public labor demand. Due to the high public wage, the private sector loses high education and high ability workers. Causing a shortage of talents in the private sector and reducing private aggregate labor demand.  Using data from Brazil and RDD, I show that there is indeed a high degree of positive sorting in the Brazilian municipal public sector. As predicted by the theory when that happens, wages and economic activity decreases with increases in public sector labor demand.

Capital Theory (UChicago), Trade Workshop (UChicago), Applied Micro Lunch (UChicago)


Cite

@TechReport{RePEc:fip:fedhwp:95159,
  author={Gustavo de Souza},
  title={{The Labor Market Consequences of Appropriate Technology}},
  year=2022,
  month=Sep,
  institution={Federal Reserve Bank of Chicago},
  type={Working Paper Series},
  url={https://ideas.repec.org/p/fip/fedhwp/95159.html},
  number={WP 2022-53},
  abstract={Developing countries rely on technology created by developed countries. This paper demonstrates that such reliance increases wage inequality but leads to greater production in developing countries. I study a Brazilian innovation program that taxed the leasing of international technology to subsidize national innovation. I show that the program led firms to replace technology licensed from developed countries with in-house innovations, which led to a decline in both employment and the share of high-skilled workers. Using a model of directed technological change and technology transfer, I find that increasing the share of firms that patent in Brazil by 1 p.p. decreases the skilled wage premium by 0.02% and production by 0.2%},
  keywords={appropriate technology; directed technological change; innovation},
  doi={10.21033/wp-2022-53},
}

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