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Trade tariff, wage gap and public spending

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  • Giuranno, Michele

    ()

  • Nocco, Antonella

    ()

Abstract

This paper studies the interplay between wage gap and government spending in a small open economy facing a liberalization of commodities trade with the external world. We consider a developing economy with two sectors: an export sector, which uses capital and unskilled labour, and an import-competing sector, which uses capital and skilled labour. In this specific factor model, the return to capital is the link between the two sectors. We show that there exists a direct relation between trade liberalization, which decreases the skilled-unskilled wage gap, and the level of government expenditure. However, either an unbalanced distribution of political bargaining power, or tariff revenue co-financing of public spending may break this direct relation.

Suggested Citation

  • Giuranno, Michele & Nocco, Antonella, 2015. "Trade tariff, wage gap and public spending," POLIS Working Papers 181, Institute of Public Policy and Public Choice - POLIS.
  • Handle: RePEc:uca:ucapdv:181
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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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