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Fair Wage Hypothesis, Foreign Capital Inflow and Skilled-unskilled Wage Inequality in the Presence of Agricultural Dualism

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  • Chaudhuri, Sarbajit

Abstract

The paper develops a four-sector general equilibrium model where the fair wage hypothesis is valid and there is agricultural dualism for analyzing the consequence of an inflow of foreign capital on the skilled-unskilled wage inequality and the unemployment of skilled labour in a developing economy. The unskilled workers are fully employed but there is imperfection in the market for unskilled labour. On the contrary, the skilled wage is set by the firms by minimizing the unit cost of skilled labour and their efficiency depends on the relative income distribution and the unemployment rate. The analysis finds that an inflow of foreign capital worsens the relative wage inequality but lowers the unemployment of skilled labour. It provides an alternative theoretical foundation to the empirical finding that inflows of foreign capital might have produced unfavourable effect on the wage inequality in the developing countries during the liberalized regime by increasing the relative demand for skilled labour.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9394.

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Date of creation: 23 Jun 2008
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Handle: RePEc:pra:mprapa:9394

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Keywords: Fair wage hypothesis; agricultural dualism; skilled labour; unskilled labour; relative wage inequality; foreign capital; unemployment;

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  1. Chaudhuri, Sarbajit, 2007. "Foreign capital, welfare and urban unemployment in the presence of agricultural dualism," Japan and the World Economy, Elsevier, Elsevier, vol. 19(2), pages 149-165, March.
  2. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Department of Economics, California Davis - Department of Economics 95-14, California Davis - Department of Economics.
  3. 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.
  4. Beladi, Hamid & Chaudhuri, Sarbajit & Yabuuchi, Shigemi, 2007. "Can International Factor Mobility lessen Wage Inequality in a Dual Economy?," MPRA Paper 2641, University Library of Munich, Germany.
  5. Marjit, Sugata & Kar, Saibal, 2005. "Emigration and wage inequality," Economics Letters, Elsevier, Elsevier, vol. 88(1), pages 141-145, July.
  6. Sugata Marjit & Hamid Beladi & Avik Chakrabarti, 2004. "Trade and Wage Inequality in Developing Countries," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 42(2), pages 295-303, April.
  7. Gordon H. Hanson & Ann Harrison, 1999. "Trade liberalization and wage inequality in Mexico," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 52(2), pages 271-288, January.
  8. Yabuuchi, Shigemi & Chaudhuri, Sarbajit, 2007. "International migration of labour and skilled-unskilled wage inequality in a developing economy," Economic Modelling, Elsevier, Elsevier, vol. 24(1), pages 128-137, January.
  9. Chaudhuri, Sarbajit & Yabuuchi, Shigemi, 2007. "Economic liberalization and wage inequality in the presence of labour market imperfection," International Review of Economics & Finance, Elsevier, Elsevier, vol. 16(4), pages 592-603.
  10. 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, University of Chicago Press, vol. 15(3), pages S44-71, July.
  11. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc.
  12. Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 255-83, May.
  13. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
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Cited by:
  1. Chaudhuri, Sarbajit, 2010. "Economic recession, demand constraint and labour markets in a developing economy," MPRA Paper 27433, University Library of Munich, Germany.
  2. 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.

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