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Urban development, excessive entry of firms and wage inequality in developing countries

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  • Hamid Beladi
  • Chi‐Chur Chao
  • Mong Shan Ee
  • Daniel Hollas

Abstract

This paper examines the short and long‐term effects of urbanisation, via favourable urban development policies, on income distribution and social welfare for a developing country, in which the urban manufacturing sector is characterised by imperfect competition and free entry. Urbanisation shifts rural workers to the highly productive urban sector, while causing production in urban firms to expand because of scale economies. However, urbanisation may worsen wage inequality between skilled and unskilled labour in the short term. In the long term, urbanisation can attract new firms to the urban sector and favourable urban development policies may result in excessive entry of firms, which can amplify wage inequality in the economy. This entry‐amplifying effect is confirmed empirically, especially for low and lower‐middle‐income countries. If the entry effect is not considered, the impact of urbanisation on wage inequality could be understated by 13% for low and lower‐middle‐income countries.

Suggested Citation

  • Hamid Beladi & Chi‐Chur Chao & Mong Shan Ee & Daniel Hollas, 2020. "Urban development, excessive entry of firms and wage inequality in developing countries," The World Economy, Wiley Blackwell, vol. 43(1), pages 212-238, January.
    • Handle: RePEc:bla:worlde:v:43:y:2020:i:1:p:212-238
    DOI: 10.1111/twec.12778
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    Cited by:

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    2. Leonard F. S. Wang & Ji Sun, 2023. "Corporate profit tax, firm entry with unemployment, and income inequality," Bulletin of Economic Research, Wiley Blackwell, vol. 75(2), pages 380-392, April.
    3. Chao, Chi-Chur & Trinh, Cong Tam & Nguyen, Xuan, 2023. "Carbon neutrality and wage inequality in a sustainable economy: New evidence from business dynamism," Economic Modelling, Elsevier, vol. 127(C).
    4. Nguyen Minh Ha & Nguyen Dang Le & Pham Trung-Kien, 2019. "The Impact of Urbanization on Income Inequality: A Study in Vietnam," JRFM, MDPI, vol. 12(3), pages 1-14, September.
    5. Hari Bansha Dulal, 2019. "Cities in Asia: how are they adapting to climate change?," Journal of Environmental Studies and Sciences, Springer;Association of Environmental Studies and Sciences, vol. 9(1), pages 13-24, March.

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    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

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