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Wage inequality in a dual economy and international mobility of factors: Do factor intensities always matter?

  • Chaudhuri, Sarbajit

The paper develops a three-sector specific factor model with Harris-Todaro type unemployment to examine the consequences of international factor mobility on the skilled-unskilled wage inequality and urban unemployment of unskilled labour in a small open dual economy. The theoretical analysis shows that the consequences of international factor mobility on wage inequality may not necessarily depend on the difference in the factor intensity condition. Only when the unskilled wage in the low-skill urban sector is positively related to the rural wage, factor intensity conditions do matter. An emigration of skilled labour or an inflow of foreign capital may move the wages in favour of the unskilled labour and lower the magnitude of urban unemployment only if the low-skill urban sector is capital-intensive (in a special sense). But, an immigration of unskilled labour produces exactly the opposite effects. The paper argues that provided the government undertakes supplementary measures to curb trade union power and prevent illegal immigration of unskilled labour, abundant inflows of foreign capital might be a solution to both deteriorating wage inequality and increasing unemployment of unskilled labour in the liberalized regime.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 25 (2008)
Issue (Month): 6 (November)
Pages: 1155-1164

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Handle: RePEc:eee:ecmode:v:25:y:2008:i:6:p:1155-1164
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers 95-14, California Davis - Institute of Governmental Affairs.
  2. Marjit, Sugata & Kar, Saibal, 2005. "Emigration and wage inequality," Economics Letters, Elsevier, vol. 88(1), pages 141-145, July.
  3. 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.
  4. Chandra, Vandana & Khan, M Ali, 1993. "Foreign Investment in the Presence of an Informal Sector," Economica, London School of Economics and Political Science, vol. 60(237), pages 79-103, February.
  5. Grinols, Earl L, 1991. "Unemployment and Foreign Capital: The Relative Opportunity Costs of Domestic Labour and Welfare," Economica, London School of Economics and Political Science, vol. 58(229), pages 107-21, February.
  6. Sarbajit Chaudhuri & Shigemi Yabuuchi, 2005. "Economic Liberalization And Wage Inequality In The Presence Of Labour Market Imperfection," International Trade 0510008, EconWPA.
  7. Yabuuchi, Shigemi & Chaudhuri, Sarbajit, 2007. "International migration of labour and skilled-unskilled wage inequality in a developing economy," Economic Modelling, Elsevier, vol. 24(1), pages 128-137, January.
  8. Sarbajit Chaudhuri, 2005. "Foreign Capital, Welfare And Urban Unemployment In The Presence Of Agricultural Dualism," International Trade 0510010, EconWPA.
  9. Corden, W M & Findlay, Ronald, 1975. "Urban Unemployment, Intersectoral Capital Mobility and Development Policy," Economica, London School of Economics and Political Science, vol. 42(165), pages 59-78, February.
  10. Shigemi Yabuuchi, 2007. "Unemployment and International Factor Movement in the Presence of Skilled and Unskilled Labor," Review of Development Economics, Wiley Blackwell, vol. 11(3), pages 437-449, 08.
  11. Wood, Adrian, 1997. "Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom," World Bank Economic Review, World Bank Group, vol. 11(1), pages 33-57, January.
  12. Sugata Marjit & Hamid Beladi & Avik Chakrabarti, 2004. "Trade and Wage Inequality in Developing Countries," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 295-303, April.
  13. Sarbajit Chaudhuri, 2003. "How and how far to liberalize a developing economy with informal sector and factor market distortions," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 12(4), pages 403-428.
  14. Jones, Ronald W. & Peter Neary, J., 1984. "The positive theory of international trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 1, pages 1-62 Elsevier.
  15. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
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