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Foreign Capital and Skilled-unskilled Wage Inequality in a Developing Economy with Non-traded Goods

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  • Chaudhuri, Sarbajit
  • Yabuuchi, Shigemi

Abstract

The existing theoretical literature does not take into consideration the existence of non-traded goods and the nature of capital mobility between the traded and the non-traded sectors in analyzing the consequences of liberalized investment policies on the relative wage inequality in the developing countries. The present paper purports to fill in this gap using two four-sector general equilibrium models reasonable for a developing economy. We have found that inflows of foreign capital usually improve the wage inequality when the low-skill sector is capital-intensive. But, the relative wage gap may widen if the high-skill sector is capital-intensive. When the non-traded sector produces a non-traded final commodity wage inequality worsens if the low-skill sector is capital-intensive and employs only a very small proportion of the unskilled workforce and if the primary export sector is unskilled labour-intensive. Appropriate policy recommendations for improving the wage inequality have also been made.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2645.

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Date of creation: 16 Mar 2007
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Handle: RePEc:pra:mprapa:2645

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Keywords: Skilled labour; unskilled labour; wage inequality; foreign capital inflows; non-traded goods; intersectoral capital mobility; labour market imperfection;

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References

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  1. Beyer, Harald & Rojas, Patricio & Vergara, Rodrigo, 1999. "Trade liberalization and wage inequality," Journal of Development Economics, Elsevier, vol. 59(1), pages 103-123, June.
  2. Chaudhuri, Sarbajit, 2007. "Foreign capital, welfare and urban unemployment in the presence of agricultural dualism," Japan and the World Economy, Elsevier, vol. 19(2), pages 149-165, March.
  3. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Department of Economics 95-14, California Davis - Department of Economics.
  4. Jones, Ronald W. & Peter Neary, J., 1984. "The positive theory of international trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 1, pages 1-62 Elsevier.
  5. Chaudhuri, Sarbajit & Yabuuchi, Shigemi, 2007. "Economic liberalization and wage inequality in the presence of labour market imperfection," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 592-603.
  6. Khan, M. Ali, 1982. "Tariffs, foreign capital and immiserizing growth with urban unemployment and specific factors of production," Journal of Development Economics, Elsevier, vol. 10(2), pages 245-256, April.
  7. Brecher, Richard A. & Diaz Alejandro, Carlos F., 1977. "Tariffs, foreign capital and immiserizing growth," Journal of International Economics, Elsevier, vol. 7(4), pages 317-322, November.
  8. Marjit, Sugata, 2003. "Economic reform and informal wage--a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 371-378, October.
  9. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc.
  10. Chandra, Vandana & Khan, M Ali, 1993. "Foreign Investment in the Presence of an Informal Sector," Economica, London School of Economics and Political Science, vol. 60(237), pages 79-103, February.
  11. Sarbajit Chaudhuri, 2003. "How and how far to liberalize a developing economy with informal sector and factor market distortions," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 12(4), pages 403-428.
  12. Sugata Marjit & Hamid Beladi & Avik Chakrabarti, 2004. "Trade and Wage Inequality in Developing Countries," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 295-303, April.
  13. Sarbajit Chaudhuri & Shigemi Yabuuchi & Ujjaini Mukhopadhyay, 2006. "Inflow Of Foreign Capital And Trade Liberalization In A Model With An Informal Sector And Urban Unemployment," Pacific Economic Review, Wiley Blackwell, vol. 11(1), pages 87-103, 02.
  14. Chao, Chi-Chur & Yu, Eden S. H., 1994. "Foreign capital inflows and welfare in an economy with imperfect competition," Journal of Development Economics, Elsevier, vol. 45(1), pages 141-154, October.
  15. Currie, Janet & Harrison, Ann E, 1997. "Sharing the Costs: The Impact of Trade Reform on Capital and Labor in Morocco," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S44-71, July.
  16. Yabuuchi, Shigemi & Chaudhuri, Sarbajit, 2007. "International migration of labour and skilled-unskilled wage inequality in a developing economy," Economic Modelling, Elsevier, vol. 24(1), pages 128-137, January.
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Citations

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Cited by:
  1. Chaudhuri, Sarbajit & Banerjee, Dibyendu, 2010. "Foreign capital inflow, skilled-unskilled wage inequality and unemployment of unskilled labour in a fair wage model," Economic Modelling, Elsevier, vol. 27(1), pages 477-486, January.
  2. Chaudhuri, Sarbajit & Banerjee, Dibyendu, 2009. "Foreign Capital, National Welfare and Unemployment in a Fair Wage Model," MPRA Paper 18005, University Library of Munich, Germany.
  3. Chakrabarti, Avik & Mitra, Rajarshi, 2010. "Skilled-unskilled wage inequality and offshore outsourcing with asymmetric adjustment costs," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 340-345, April.
  4. Gupta, Manash Ranjan & Dutta, Priya Brata, 2011. "Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis," Economic Modelling, Elsevier, vol. 28(4), pages 1977-1983, July.
  5. Dwibedi, Jayanta & Chaudhuri, Sarbajit, 2011. "Poverty alleviation programs, FDI-led growth and child labour under agricultural dualism," MPRA Paper 29997, University Library of Munich, Germany.
  6. Chaudhuri, Sarbajit, 2010. "Economic recession, demand constraint and labour markets in a developing economy," MPRA Paper 27433, University Library of Munich, Germany.

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