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Fragmentation in Production, Vertical Integration and Wage Inequality: A Theoretical Note

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  • Das, Gouranga
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    Abstract

    Developing a three-sector and four-factor general equilibrium model, this paper offers an explanation of wage inequality in a vertically fragmented production structure typical of off-shore outsourcing to developing countries like China or India. The model characterizes a typical developing economy where intermediate good is produced using capital and local low-skilled worker, traditional sector uses unskilled worker to produce agricultural products and skilled worker works in tandem with intermediates to produce final goods for export. The model furnishes that wage dispersion could be explained theoretically in this specific-factor general equilibrium structure where factor returns are endogenously determined within a production structure with middle products. In particular, scenario analysis shows that increase in relative price of final good aggravates wage inequality, whereas opposite happens when price of intermediates and import-competing sector inflates. Skilling the unskilled and protecting the sector intensive in low-skilled could attenuate the adverse impact.

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    File URL: http://mpra.ub.uni-muenchen.de/47455/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47455.

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    Date of creation: 15 Dec 2012
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    Publication status: Published in Modern Economy 3.6(2012): pp. 958-964
    Handle: RePEc:pra:mprapa:47455

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    Keywords: Wage Inequality; Fragmentation; Vertical Specialization; Specific Factor;

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    1. Grossman, G.M. & Helpman, E., 2002. "Outsourcing in a Global Economy," Papers 218, Princeton, Woodrow Wilson School - Public and International Affairs.
    2. Bridgman, Benjamin, 2012. "The rise of vertical specialization trade," Journal of International Economics, Elsevier, vol. 86(1), pages 133-140.
    3. Daniel Horgos, 2007. "Labor Market Effects of International Outsourcing: How Measurement Matters," SOEPpapers on Multidisciplinary Panel Data Research 58, DIW Berlin, The German Socio-Economic Panel (SOEP).
    4. Nathalie Chusseau & Michel Dumont & Jo�l Hellier, 2008. "Explaining Rising Inequality: Skill-Biased Technical Change And North-South Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 409-457, 07.
    5. David Hummels & Jun Ishii & Kei-Mu Yi, 1999. "The nature and growth of vertical specialization in world trade," Staff Reports 72, Federal Reserve Bank of New York.
    6. Ronald Jones & Sugata Marjit, 2009. "Competitive trade models and real world features," Economic Theory, Springer, vol. 41(1), pages 163-174, October.
    7. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, January.
    8. Das, Gouranga, 2010. "Globalization, socio-institutional factors and North–South knowledge diffusion: Role of India and China as Southern growth progenitors," MPRA Paper 37252, University Library of Munich, Germany, revised 01 Aug 2011.
    9. Gouranga Das, 2009. "A hybrid production structure in trade: theory and implications," International Review of Economics, Springer, vol. 56(4), pages 359-375, December.
    10. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
    11. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
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