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Why Are Wages Of Both Skilled and Unskilled Workers Lower in Poor Countries?

Author

Listed:
  • Naveen Srinivasan

    (Madras School of Economics, Chennai, Tamil Nadu, India, 600025)

  • Poorna Narayanan

    (Madras School of Economics, Chennai, Tamil Nadu, India, 600025)

  • Megana Prabha

    (London School of Economics and Political Science, Houghton Street, London, WC2A 2AE, United Kingdom)

  • Hariharasudhan Selvaraj

    ((corresponding author) Madras School of Economics, Chennai, Tamil Nadu, India, 600025)

Abstract

We introduce credit constraints into a standard model of endogenous growth. In the presence of credit constraints, firms in poor countries face higher borrowing costs which in turn negatively affects capital accumulation and labor productivity in the final-goods producing sector. Furthermore, lower capital intensity of production makes R&D activity less profitable. As a result, both demand for skilled labor and return to skill are lower in poor countries. Domestic financial frictions may therefore be the key to understanding the persistent wage differentials in favor of rich countries and international migration patterns we observe.

Suggested Citation

  • Naveen Srinivasan & Poorna Narayanan & Megana Prabha & Hariharasudhan Selvaraj, 2025. "Why Are Wages Of Both Skilled and Unskilled Workers Lower in Poor Countries?," Working Papers 2025-289, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2025-289
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    Keywords

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    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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