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Increasing dispersion of skills and rising earnings inequality

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  • Lam, Kit-Chun
  • Liu, Pak-Wai
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    Abstract

    In recent decades many countries have simultaneously liberalized their trading regimes and expanded their education systems. The theoretical effect of these regime shifts on the wage differential between skilled and unskilled workers is ambiguous. On the one hand, openness to trade causes demand shifts in the labor market which may widen or narrow the differential. This result depends on whether the unskilled wage is depressed, as in the case of importing countries, or raised, as in the case of exporting countries. On the other hand, an increased supply of more educated workers reduces their wages and narrows the skill wage gap. In this study of the labor market of Hong Kong, we document that recent changes in response to the trade liberalization of Mainland China and expanded access to education have increased the earnings differential between skilled and unskilled workers. Using detailed census data, we argue that the main reason for this outcome is the widened dispersion of skills across the earnings distribution, resulting from demand and supply shifts in the labor market caused by trade openness and expanded access to higher education.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Comparative Economics.

    Volume (Year): 39 (2011)
    Issue (Month): 1 (March)
    Pages: 82-91

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    Handle: RePEc:eee:jcecon:v:39:y:2011:i:1:p:82-91

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    Web page: http://www.elsevier.com/locate/inca/622864

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    Keywords: Education Earnings Inequality Trade Liberalization;

    References

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    1. Gustavo Gonzaga & Naércio Menezes Filho & Cristina Terra, 2006. "Trade Liberalization and the Evolution of Skill Earnings Differentials in Brazil," Development Working Papers, Centro Studi Luca d\'Agliano, University of Milano 216, Centro Studi Luca d\'Agliano, University of Milano.
    2. Hendel, Igal & Shapiro, Joel & Willen, Paul, 2005. "Educational opportunity and income inequality," Journal of Public Economics, Elsevier, Elsevier, vol. 89(5-6), pages 841-870, June.
    3. Paul Krugman, 1995. "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 327-377.
    4. Attanasio, Orazio & Goldberg, Pinelopi & Pavcnik, Nina, 2003. "Trade Reforms and Wage Inequality in Colombia," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4023, C.E.P.R. Discussion Papers.
    5. Robertson, Raymond, 2004. "Relative prices and wage inequality: evidence from Mexico," Journal of International Economics, Elsevier, Elsevier, vol. 64(2), pages 387-409, December.
    6. Bound, John & Johnson, George, 1992. "Changes in the Structure of Wages in the 1980's: An Evaluation of Alternative Explanations," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 371-92, June.
    7. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 45(1), pages 39-82, March.
    8. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 921-55, November.
    9. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 40(1), pages 7-72, March.
    10. Beyer, Harald & Rojas, Patricio & Vergara, Rodrigo, 1999. "Trade liberalization and wage inequality," Journal of Development Economics, Elsevier, Elsevier, vol. 59(1), pages 103-123, June.
    11. Blau, Francine D & Kahn, Lawrence M, 1996. "International Differences in Male Wage Inequality: Institutions versus Market Forces," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(4), pages 791-836, August.
    12. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 410-42, June.
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    Cited by:
    1. Hang Gao & Joseph Marchand & Tao Song, 2013. "The Supply and Demand Factors Behind the Relative Earnings Increases in Urban China at the Turn of the 21st Century," Comparative Economic Studies, Palgrave Macmillan, Palgrave Macmillan, vol. 55(1), pages 121-143, March.
    2. Kee-Lee Chou & Kelvin Cheung & Maggie Lau & Tony Sin, 2014. "Trends in Child Poverty in Hong Kong Immigrant Families," Social Indicators Research, Springer, Springer, vol. 117(3), pages 811-825, July.
    3. Pi, Jiancai & Zhou, Yu, 2014. "Foreign capital, public infrastructure, and wage inequality in developing countries," International Review of Economics & Finance, Elsevier, Elsevier, vol. 29(C), pages 195-207.

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