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Economic Liberalization And Wage Inequality In The Presence Of Labour Market Imperfection

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Author Info
Sarbajit Chaudhuri (Dept. of Economics, University of Calcutta, India)
Shigemi Yabuuchi (Dept. of Economics, Nagoya City University, Japan)

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Abstract

Removal of tariff restrictions from the relatively low-skill sectors; growth in foreign direct investment; and, decline of trade union strength of the unskilled workers are cited in the empirical literature as the prime factors responsible for the growing incidence of wage inequality in many of the developing countries in the liberalized trade and investment regime. This paper has made an attempt to provide a theoretical foundation of those empirical findings in terms of a three sector general equilibrium model reasonable for at least a few developing economies. The analysis of the paper has found that the wage inequality rises unambiguously due to policies like an increase in the relative price of the high-skill commodity and a reduction of import tariff from the low-skill manufacturing sector. However, an inflow of foreign capital produces a favourable effect on the wage inequality under a reasonable factor intensity condition. Interestingly, contrary to the common wisdom, a policy of labour market reform may raise the competitive unskilled wage and improve wage inequality under reasonable condition.

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Paper provided by EconWPA in its series International Trade with number 0510008.

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Length: 20 pages
Date of creation: 20 Oct 2005
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Handle: RePEc:wpa:wuwpit:0510008

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Related research
Keywords: Skilled labour unskilled labour wage inequality Latin American countries trade liberalization labour market imperfection

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Department of Economics 95-14, California Davis - Department of Economics.
    Other versions:
  2. Sarbajit Chaudhuri, 2003. "How and how far to liberalize a developing economy with informal sector and factor market distortions," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 12(4), pages 403-428, December. [Downloadable!] (restricted)
  3. 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)
  4. Revenga, Ana, 1997. "Employment and Wage Effects of Trade Liberalization: The Case of Mexican Manufacturing," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S20-43, July. [Downloadable!] (restricted)
  5. Mazumdar, Dipak, 1983. "Segmented Labor Markets in LDCs," American Economic Review, American Economic Association, vol. 73(2), pages 254-59, May. [Downloadable!] (restricted)
  6. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Marjit, Sugata, 2003. "Economic reform and informal wage--a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 371-378, October. [Downloadable!] (restricted)
  8. Wood, Adrian, 1997. "Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom," World Bank Economic Review, Oxford University Press, vol. 11(1), pages 33-57, January.
  9. Geeta Kingdon & John Knight, 2004. "Unemployment in South Africa: the nature of the beast," Labor and Demography 0409003, EconWPA. [Downloadable!]
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  10. Ronald W. Jones & Sugata Marjit, 2003. "Economic Development, Trade and Wages," German Economic Review, Blackwell Publishing, vol. 4(1), pages 1-17, February.
  11. Cole, William E & Sanders, Richard D, 1985. "Internal Migration and Urban Employment in the Third World," American Economic Review, American Economic Association, vol. 75(3), pages 481-94, June. [Downloadable!] (restricted)
  12. Marjit, Sugata & Kar, Saibal, 2005. "Emigration and wage inequality," Economics Letters, Elsevier, vol. 88(1), pages 141-145, July. [Downloadable!] (restricted)
  13. Carruth, Alan A. & Oswald, Andrew J., 1981. "The determination of union and non-union wage rates," European Economic Review, Elsevier, vol. 16(2), pages 285-302. [Downloadable!] (restricted)
  14. 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)
    Other versions:
  15. Winters, L Alan, 2000. "Trade, Trade Policy and Poverty: What Are The Links?," CEPR Discussion Papers 2382, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  1. Takeho Nakamura, 2007. "Wage inequality and welfare effects of domestic technological progress: a dual economy approach," Economics Bulletin, Economics Bulletin, vol. 15(22), pages 1-14. [Downloadable!]
  2. 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. [Downloadable!]
  3. Chaudhuri, Sarbajit, 2006. "Wage Inequality in a Dual Economy and International Mobility of Factors: DO Factor Intensities always matter?," MPRA Paper 1356, University Library of Munich, Germany. [Downloadable!]
  4. Chaudhuri, Sarbajit & Yabuuchi, Shigemi, 2007. "Foreign Capital and Skilled-unskilled Wage Inequality in a Developing Economy with Non-traded Goods," MPRA Paper 2645, University Library of Munich, Germany. [Downloadable!]
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