Increasing Returns to Scale Within Limits: A Model of ICT and its Effect on the Income Distribution and Occupation Choice

A key feature of Information and Communication Technologies (ICT) is that they increase the size of the market - or the "scale of operation" - for workers in some occupations. We model the scale of operation as the limit up to which the production technology displays increasing returns to scale. We then explore the implications of this feature of ICT for the income distribution within affected occupations, as well as for individuals' occupational choices. Within occupations, an increase in the scale of operation intensifies competition between workers and increases inequality. It also drives the lowest-ability workers out of the occupation while reducing the earnings of the next lowest-ability work- ers when the substitutability between the output of the affected occupations and that of the rest of the economy is low.