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Trade tariff, wage gap and public spending

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  • Giuranno, Michele G.
  • Nocco, Antonella

Abstract

This paper studies the interplay between wage gap and government spending in a small open economy facing a shock in trade policy. We consider a specific factor model with an export sector, which uses skilled labour, and an import-competing sector, which uses unskilled labour. We find the conditions under which there exists an inverse (direct) relation between trade liberalization (protection), which increases (decreases) the skilled-unskilled wage gap, and the level of government expenditure. We also show how either an unbalanced distribution of political bargaining power, or tariff revenue co-financing public spending may break this inverse relation. Moreover, the direct relation between tariff protection and public goods provision can be strenghtened by progressive taxation and weakened by regressive taxation.

Suggested Citation

  • Giuranno, Michele G. & Nocco, Antonella, 2020. "Trade tariff, wage gap and public spending," Economic Modelling, Elsevier, vol. 91(C), pages 167-179.
  • Handle: RePEc:eee:ecmode:v:91:y:2020:i:c:p:167-179
    DOI: 10.1016/j.econmod.2020.05.029
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    More about this item

    Keywords

    Wage gap; Trade liberalization; Positive political economy;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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