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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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  • 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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    4. 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.
    5. 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.

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