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Trade and Inequality with Limited Labor Mobility: Theory and Evidence from China

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  • Muqun Li
  • Ian Coxhead

Abstract

Does globalization increase inequality in developing countries, and ifso, how? In a theoretical model of a regionally heterogeneous economy, we show how different regional rates of technical progress due to trade and FDI interact with constraints to unskilled labor mobility. As favored regions benefit more from trade, their growing demand for skills drains skilled workers from disadvantaged areas, and average incomes in the former grow faster than in the latter. Moreover, this unbalanced regional growth may also raise inequality within each region. It could even reduce absolute income per capita in the less favored region. We test these predictions with Chinese data from the Open Door era. Results confirm that different regional growth rates have increased both interregional andintraregional inequality. Moreover, growth of skills-based export industries in coastal regions is associated, other things equal, with lower incomes for the poor in inland provinces.
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Suggested Citation

  • Muqun Li & Ian Coxhead, 2011. "Trade and Inequality with Limited Labor Mobility: Theory and Evidence from China," Review of Development Economics, Wiley Blackwell, vol. 15(1), pages 48-65, February.
    • Handle: RePEc:bla:rdevec:v:15:y:2011:i:1:p:48-65
    DOI: j.1467-9361.2010.00592.x
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    Cited by:

    1. Phan, Diep & Coxhead, Ian, 2013. "Long-run costs of piecemeal reform: Wage inequality and returns to education in Vietnam," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1106-1122.
    2. Ma, Cao-Yuan & Ni, Xiu-Feng & Li, Ting-Rui, 2025. "Labor migration, economic growth, and welfare inequality: A quantitative analysis of China," Economic Systems, Elsevier, vol. 49(3).
    3. Yao Pan & Jessica Leight, 2021. "Educational Responses to Migration-Augmented Export Shocks: Evidence from China," Working Papers 2021-14, The George Washington University, Institute for International Economic Policy.
    4. Shanshan Wu & Libang Ma & Lucang Wang & Xianfei Chen & Zhihao Shi, 2023. "Differences of Social Space of Rural Migrant Labor Force: The Influence of Local Quality," Land, MDPI, vol. 12(3), pages 1-18, March.
    5. Ying Wu & Hong Yao, 2015. "Income Inequality, State Ownership, and the Pattern of Economic Growth – A Tale of the Kuznets Curve for China since 1978," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(2), pages 165-180, June.
    6. Wenxiao Wang & Christopher Findlay & Shandre Thangavelu, 2021. "Trade, technology, and the labour market: impacts on wage inequality within countries," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 35(1), pages 19-35, May.
    7. Kitayaporn,Varan & Coxhead,Ian, 2024. "China's New Growth Strategy: Implications for Middle-Income Economies," IDE Discussion Papers 940, Institute of Developing Economies, Japan External Trade Organization(JETRO).

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