Essays on Cross-Country Inequality and Income Differences

These essays are my attempt to answer a big picture question in economics "why some countries are richer than others?". In the first chapter, I document that for a group of 38 countries ranging from low to high income, managers in richer countries are more skilled, and the relative income of managers to non-managers along with skill premium is lower in richer countries. I use a model of investment in skills and occupational choice in which countries differ in productivity level and size-dependent distortions. I find that exogenous productivity differences alone can produce the abovefacts qualitatively, but size-dependent distortions are needed to account for these facts quantitatively. Chapter two accounts for the sources of world productivity growth, using data for more than 36 industries and 40 economies. Productivity growth in advanced economies slowed but emerging markets grew more quickly, which kept global productivity growth relatively constant until 2010. World productivity growth is highly volatile from year to year, which primarily reflects shifts in the reallocation of labor. Deviations from Purchasing Power Parity account for about a third of the shifts. Though markups are large and rise over time, they only modestly affect measured industry-level productivity growth. In chapter three, I document that the mean and dispersion of pre-tax labor earnings grow faster over the life-cycle in the U.S. than in some European countries and individuals with at least a college degree are key for these facts. I use a life-cycle model of human capital accumulation and elastic labor supply which features non-linear taxation and a college choice and investments during college. The model economy is consistent with earnings distribution among college and non-college individuals in the U.S. Non-linear taxation suppresses pre-tax earnings, reduces college attendance and investments during college. More generous subsidies for college exacerbate labor earning inequality. Differences in taxation and college subsidies account for 94% of the differences in mean earnings, and 80% of the differences in inequality over the life-cycle across the U.S. and European countries.