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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 () (University of Massachusetts Amherst)
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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Paper provided by University of Massachusetts Amherst, Department of Economics in its series 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. Beyer, Harald & Rojas, Patricio & Vergara, Rodrigo, 1999. "Trade liberalization and wage inequality," Journal of Development Economics, Elsevier, vol. 59(1), pages 103-123, June. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Prachi Mishra & Utsav Kumar, 2005. "Trade Liberalization and Wage Inequality: Evidence from India," IMF Working Papers 05/20, International Monetary Fund. [Downloadable!]
  4. Donald R. Davis, 1996. "Trade Liberalization and Income Distribution," Harvard Institute of Economic Research Working Papers 1769, Harvard - Institute of Economic Research.
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  5. 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.
  6. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May. [Downloadable!] (restricted)
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