Skilled-Unskilled Wage Inequality, Growth of Skilled Labour and Development Policies

This paper develops a small open economy model with three sectors and four factors – land, unskilled labour, skilled labour and capital. Two of these three sectors produce final traded goods of which one sector produces an agricultural product using land and unskilled labour and another sector produces a manufacturing product using skilled labour and capital. The third sector, called education sector produces a service using skilled labour and capital as inputs; and this service transforms unskilled workers into skilled workers. The current output is added to the existing stock of skilled labour at the next point of time. The paper first analyses various comparative static effects on skilled-unskilled relative wage in the static model where no factor endowment changes over time. Next, it analyses the long-run equilibrium properties in the dynamic model with intertemporal accumulation of skilled labour; and derives various comparative steady state effects on skilled unskilled relative wage. Comparative steady-state effects appear to be stronger than the corresponding comparative static effects.