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Taxation of labour, product varieties and skilled–unskilled wage inequality: Short run versus long run

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  • Sun, Sizhong
  • Anwar, Sajid

Abstract

In a three-sector general equilibrium model, we examine the impact of a partial tax on labour on skilled–unskilled wage inequality. We find that a tax on labour in industrial sector increases skilled–unskilled wage inequality in the short run and can have the opposite effect in the long run. A tax on labour in the services sector reduces skilled–unskilled wage inequality in both the short run and long run. Furthermore, the introduction of a tax on labour in agricultural sector has no effect on the skilled wage but reduces the unskilled wage. Accordingly, such a tax increases skilled–unskilled wage inequality in both the short run and long run.

Suggested Citation

  • Sun, Sizhong & Anwar, Sajid, 2015. "Taxation of labour, product varieties and skilled–unskilled wage inequality: Short run versus long run," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 250-257.
    • Handle: RePEc:eee:reveco:v:38:y:2015:i:c:p:250-257
    DOI: 10.1016/j.iref.2015.03.001
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    More about this item

    Keywords

    Skilled–unskilled wage inequality; Partial tax on labour; Product varieties; Monopolistic competition;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • D00 - Microeconomics - - General - - - General

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