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Trade Liberalization, Skill-linked Intermediate Production and the Two-sided Wage Gap

  • Sugata Marjit
  • Rajat Acharyya

A rising wage-gap, almost universally, in the last two decades has contradicted the age-old conventional wisdom of asymmetric wage movements across nations when trade is liberalized. We offer an explanation that fits well with the emerging trade pattern between the developed and more advanced developing countries like India and Mexico. We argue that a tariff reduction in the South on imports of an intermediate good from the North may raise the wage-gap in both the North and the South. The price of the intermediate good moving in different directions and different factor-intensity-ranking of this good relative to the two different final goods produced in the two countries underlie this result. Rising wage inequality may specially affect the South because educational expenses and infrastructure do not allow ready transformation of the vast masses of unskilled workers into skilled workers. Hence, the policy lesson of the paper seems to be more public effort in arranging for smoother acquisition of human capital by the unskilled.

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Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

Volume (Year): 9 (2006)
Issue (Month): 3 ()
Pages: 203-217

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Handle: RePEc:taf:jpolrf:v:9:y:2006:i:3:p:203-217
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  1. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc.
  2. Daron Acemoglu, 2003. "Patterns of Skill Premia," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 199-230, 04.
  3. Donald R. Davis, 1996. "Trade Liberalization and Income Distribution," NBER Working Papers 5693, National Bureau of Economic Research, Inc.
  4. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers 95-14, California Davis - Institute of Governmental Affairs.
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