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Globalisation and Wage Differentials: A Spatial Analysis

In this paper, we assess the Fujita, Krugman and Venables (FKV) nonlinear model of wage differentials. Using a spatial econometric model incorporating a spatial autoregressive error process, we estimate a quadratic form using cross-sectional data for 98 countries from 1970 to 2000. The evidence suggests no necessary tendency for all countries to converge towards the stable upper root. Polarization is possible. This polarization may be permanent - generating persistent international wage differentials. Our findings suggest that moderating the transmission of shocks across countries should be a key element of international macroeconomic policy co-ordination.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0845.

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Date of creation: Sep 2008
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Handle: RePEc:cam:camdae:0845
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