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Integration, Informalization, and Income Gaps in Developing Countries: Some General Equilibrium Explorations in Light of Accumulating Evidence

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  • Arslan Razmi

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    (University of Massachusetts Amherst)

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    Abstract

    Recent post-liberalization decades have seen increasing gaps between wages and profit in- come, rising skill premia, and disappointing formal sector employment growth in many develop- ing countries. This paper presents an attempt to reconcile some of these developments with the help of modified versions of simple standard trade theory factor endowment models. Measures undertaken to enhance public sector efficiency and attract investment in the export sector can create a conflict of interest between the owners of capital and labor, and increase the rental- wage and skill-unskilled wage gaps, contra the predictions of the Heckscher-Ohlin-Samuelson model. Moreover, increasing inequality can exist side-by-side with increasing informalization of the economy. The greater unskilled labor intensity of the informal sector, factor market rigidities in the formal sector, and the sector specificity of some factors crucially influence the outcomes of policy experiments. Even within a simple framework that assumes full employment of resources, large segments of labor may have good reason to fear the consequences of reform. JEL Categories: F16, O17, F11

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    Bibliographic Info

    Paper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2007-06.

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    Date of creation: Mar 2007
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    Handle: RePEc:ums:papers:2007-06

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    Keywords: Specific factors model; Ricardo-Viner model; Heckscher-Ohlin model; informaliza- tion; international production networks; elasticity of factor substitution; nominal wage rigidity; income inequality; skill premium.;

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    1. Donald R. Davis, 1996. "Trade Liberalization and Income Distribution," NBER Working Papers 5693, National Bureau of Economic Research, Inc.
    2. Prachi Mishra & Utsav Kumar, 2005. "Trade Liberalization and Wage Inequality: Evidence from India," IMF Working Papers 05/20, International Monetary Fund.
    3. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 45(1), pages 39-82, March.
    4. Beyer, Harald & Rojas, Patricio & Vergara, Rodrigo, 1999. "Trade liberalization and wage inequality," Journal of Development Economics, Elsevier, vol. 59(1), pages 103-123, June.
    5. Cornia, Giovanni Andrea & Addison, Tony & Kiiski, Sampsa, 2003. "Income Distribution Changes and their Impact in the Post-World War II Period," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    6. Sebastian Galiani & Pablo Sanguinetti, 2003. "The Impact of Trade Liberalization on Wage Inequality: Evidence from Argentina," Working Papers 65, Universidad de San Andres, Departamento de Economia, revised Oct 2003.
    7. Carr, Marilyn & Chen, Martha Alter, 2002. "Globalization and the informal economy : how global trade and investment impact on the working poor," ILO Working Papers 354172, International Labour Organization.
    8. World Bank, 2007. "Global Economic Prospects 2007 : Managing the Next Wave of Globalization," World Bank Publications, The World Bank, number 7157, October.
    9. Harrison, Ann, 2005. "Has Globalization Eroded Labor’s Share? Some Cross-Country Evidence," MPRA Paper 39649, University Library of Munich, Germany.
    10. Blunch, Niels-Hugo & Canagarajah, Sudharshan & Raju, Dhushyanth, 2001. "The informal sector revisited : a synthesis across space and time," Social Protection Discussion Papers 23308, The World Bank.
    11. Jorge Saba Arbache & Andy Dickerson & Francis Green, 2004. "Trade Liberalisation and Wages in Developing Countries," Economic Journal, Royal Economic Society, vol. 114(493), pages F73-F96, 02.
    12. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May.
    13. Marjit, Sugata, 2003. "Economic reform and informal wage--a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 371-378, October.
    14. Robert C. Feenstra & Gordon H. Hanson, 1995. "Foreign Direct Investment and Relative Wages: Evidence from Mexico's Maquiladoras," NBER Working Papers 5122, National Bureau of Economic Research, Inc.
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