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Non-homothetic preferences: Explaining unidirectional movements in wage differentials

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  • Santra, Sattwik

Abstract

This paper explores the impact of trade on the relative returns to skill in the presence of non-homothetic preferences. In a general equilibrium model of trade in differentiated products, it is shown that, if consumers react to a rise in real income by increasing their demands of the relatively skill intensive commodity/ies, then real income gains associated with trade, increase the skilled–unskilled wage ratio. This result generalizes to trade driven by comparative advantages and to technological progress.

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  • Santra, Sattwik, 2014. "Non-homothetic preferences: Explaining unidirectional movements in wage differentials," Journal of Development Economics, Elsevier, vol. 109(C), pages 87-97.
  • Handle: RePEc:eee:deveco:v:109:y:2014:i:c:p:87-97
    DOI: 10.1016/j.jdeveco.2014.03.012
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    More about this item

    Keywords

    Trade; Non-homothetic preferences; Relative wage; Skilled to unskilled wage inequality;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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