Manufacturing capital utilisation, firm dynamics and wage inequality

This paper examines the short- and long-run effects of manufacturing capital utilisation on income distribution and social welfare of an economy. A rise in manufacturing capital utilisation lowers the effective cost of capital. This increases the demand for capital in the urban sector, which raises firm output and profitability but reduces the availability of capital in the rural sector. Unskilled wage is lowered. Thus, a rise in manufacturing capital utilisation increases income inequality in the short run. In the long run, due to the firm-entry effect, a rise in manufacturing capital utilisation further exacerbates the inequality situation. Empirical analysis confirms the theoretical findings. In particular, a one per cent increase in manufacturing capital utilisation leads to about 0.58% increase in income inequality, of which the contribution from the firm-entry effect is about 28%.