Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis

The paper develops a static three sector competitive general equilibrium model of a small open economy in which skilled labor is mobile between a traded good sector and the non-traded good sector and unskilled labor is specific to another traded good sector. Capital is perfectly mobile among all these three sectors. We introduce involuntary unemployment equilibrium in both the labor markets and explain unemployment using efficiency wage hypothesis. We examine the effects of change in different factor endowments and prices of traded goods on the unemployment rates and on the skilled-unskilled relative wage. Also, we introduce Gini-Coefficient of wage income distribution as a measure of wage income inequality; and show that a comparative static effect may force the skilled-unskilled relative wage and the Gini-Coefficient of wage income distribution to move in opposite directions in the presence of unemployment.     

Monopoly,intermediate goods and the pure theory of international trade

Conclusion In a model with two traded good sectors between which intersectoral flows of intermediate goods are allowed and with a monopolized non-traded good sector, the wage rate in terms of two traded goods increases and the rental of capital in terms of two traded goods decreases when the price of relatively more labor intensive traded good sector increases, though nothing definite can be said about the direction of change in the wage rate and rental in terms of the non-traded good. When prices of traded goods are kept constant and labor and/or capital increase(s), output of the non-traded good sector increases provided that the non-traded good is not inferior, having income elasticity of demand less than unity. The factor intensity condition for the traded goods is in general not sufficient for the validity of the Rybczynski theorem to hold with respect to net outputs of the traded goods. We have derived sufficient conditions for the magnification effect to be observed with respect to net outputs of the traded good sectors. Specifically, we have shown that the factor intensity condition (23) is sufficient for the magnification effect to prevail when only labor increases.     

A DYNAMIC MODEL OF TOURISM, EMPLOYMENT AND WELFARE: THE CASE OF HONG KONG

Abstract.  The present paper uses a dynamic open-economy model with wage indexation to examine the impact of tourism on employment and welfare. Both short-run and long-run situations are analysed. It is well known that tourism converts non-traded goods into tradable goods. An increase in the demand for a non-traded good raises its relative price, which results in an expansion of the non-traded sector at the expense of the traded goods sector. This output shift raises labour employment in the short run. However, in the long run, the higher relative price leads to higher wages, resulting in a negative impact on labour employment. If the output effect is dominant, the expansion in tourism raises employment and welfare. However, under realistic conditions tourism may lower both labour employment and welfare due to rising costs. These results are demonstrated by simulating a dynamic model for the case of Hong Kong.     

Wage spillovers across sectors in Eastern Europe

This paper studies the interactions between wages in the public sector and the private traded and non-traded sector in ten transition countries which are members of the European Union, during the period 2000–2011. The theoretical literature on wage spillovers, as well as the Balassa–Samuelson hypothesis, suggests that the internationally traded sector should be the leader in wage setting, with sheltered and public sector wages adjusting. Using a cointegrated VAR approach we show that a large heterogeneity across countries is present, and non-traded and public sector wages are often leaders in wage determination or at least affect traded sector wages in the short run. This result is relevant from a policy perspective since wage spillovers, leading to costs growing faster than productivity, may affect the international cost competitiveness of the traded sector and thus the catching-up process may be accompanied by accumulation of large international imbalances.     

Another Look at Wage Distortion in a Developing Dual Economy

The paper focuses on an endogenous wage distortion in a developing dual economy where an efficiency wage in the urban sector triggers rural-urban migration. Because of the endogenous nature of the distortion, this migration reduces the severity of distortion by creating more jobs and reducing the actual wage differential between the sectors. These results are in sharp contrast to the outcomes of an exogenous wage distortion (minimum wage) where rural-urban migration increases the severity of unemployment and calls for costly policy mechanisms that might be either politically or economically difficult to implement. Furthermore, in contrast to the case of an exogenous distortion, interregional migration with endogenous wage distortion increases urban industrial output and structural transformation works its way into the development process. This structural transformation is maintained even when this dual economy engages in the production of non-traded goods. Although this paper does not engage in policy ranking to bring in zero unemployment equilibrium, it shows that it is possible to achieve socially desirable level of migration by influencing detection rate of shirking or disutility of work effort instead of using costly distributive parameters such as taxes and subsidies.     

Welfare and equity impacts of cross-border factor mobility in Bangladesh: A general equilibrium analysis

We develop a dynamic computable general equilibrium model with cross-border factor mobility to assess the impacts of a foreign wage shock and the effects of counteractive policy measures in Bangladesh. The model features migration of workers and foreign direct investment (FDI) in the ready-made garments (RMG) sector. Our simulation results show that returning migrants induced by a foreign wage fall would reduce household welfare by lowering wages and increasing unemployment, particularly for unskilled workers in the domestic labor market. To counteract this negative shock, FDI promotion in the RMG sector and a human-capital development program are considered. The former policy minimizes the negative impacts of the foreign labor market shock, while a combination of both policies is more equitable.     

Long-run costs of piecemeal reform: Wage inequality and returns to education in Vietnam

In this paper, we examine changes in wage structure and wage premia during Vietnam’s transition from command to market economy. Relative to other work in this literature, our paper is unique in that we identify the policies that lead to such changes. By examining skill premium trends along the two dimensions of particular importance to the transition—state or non-state firms, and traded or non-traded industries—we are able to separate the contribution of external liberalization to wage growth and rising skill premia from that of domestic labor market reforms, and to examine potential interactions between the two types of reform. The results point to the high cost of incomplete reform in Vietnam. Capital market segmentation creates a two-track market for skills, in which state sector workers earn high salaries while non-state workers face lower demand and lower compensation. Growth is reduced directly by diminished allocative efficiency and reduced incentives to acquire education, and indirectly by higher wage inequality and rents for workers with access to state jobs.     

Fiscal policy,macroeconomic performance and industry structure in a small open economy

We analyse how fiscal policy affects both the macroeconomy and the industry structure, using a multi-sector macroeconomic model of the Norwegian economy with an inflation targeting monetary policy. Our simulations show that the magnitude of the government spending and labour tax cut multipliers, whether monetary policy is active or passive, is comparable to what is found in the literature. A novel finding from our simulations is that the industry structure is substantially affected by an expansionary fiscal policy, as value added in the non-traded goods sector increases at the expense of value added in the traded goods sector. Moreover, expansionary fiscal policy reduces the mark-ups in the traded goods sector, while the mark-ups are roughly unchanged in the non-traded goods sector. The contraction of activity in the traded goods sector increases when monetary tightening accompanies the fiscal stimulus. Hence, we find that such a policy mix is likely to produce significant de-industrialization in a small open economy with inflation targeting.     

Environmental control,wage inequality and national welfare in a tourism economy

This paper examines the effects of stricter environmental regulation on income distribution and welfare for an open economy with inbound tourism. The pollution input is considered as a mobile factor between sectors, and a decrease in it lowers wages of skilled labor in the traded sector but can increase the wages of unskilled labor in the non-traded sector. A stricter policy on environmental controls can narrow wage inequality and increase welfare if the tourism terms-of-trade effect dominates. These results are confirmed by simulations.     

Appropriation,migration, and unemployment

This article builds general equilibrium models to explore the relationship among appropriation, rural–urban migration, the minimum wage and unemployment. We find that the proportion of appropriated capital plays a key role in the effects of appropriation on unemployment and rural–urban migration. When the proportion of appropriated capital is large, a stronger control on appropriation by the government results in a lower unemployment rate and more rural–urban migrants, and vice versa. In the extended models, the conclusion may be different when the plundered factor changes from capital to land. In the situation with the agricultural sector employing unskilled labour and capital, appropriation has no impact on unemployment, and the effect on migration remains the same. We also discuss the implications of the minimum wage, and find that under plausible conditions, the rise of the minimum wage can alleviate appropriation and reduce unemployment. The situation of migration is ambiguous due to the impacts of two opposite factors.     

ILLEGAL MIGRANTS, TOURISM AND WELFARE: A TRADE THEORETIC APPROACH

Abstract.  Many countries receive illegal migrants but are reluctant to accept them due to possible negative externalities. We provide a rationale for not policing illegal migration by linking it to the tourism industry. By paying illegal migrants less than local workers, the relative price of the non-traded goods is shown to be lower than it would be in the absence of such workers. An expansion in tourist trade, under certain intensity conditions, necessarily raises resident welfare and employment. This tourist boom necessarily lowers the welfare of the illegal migrants. It is established that an increase in tourism increases the supply of illegal migrants.     

Short-term policy in open semi-industrialized economies: The narrow limits of the possible

This paper develops a model to analyze short-term policy alternatives in semi-industrialized countries. The major points raised are the following: (i) There are two sectors, producing traded and non-traded goods. The latter is characterized by a fairly low elasticity of substitution and a high relative labor share. If the elasticity of substitution in the traded goods sector has an econometrically reasonable value, then short-run improvements in both the labor share and real income may well call for revaluation of the exchange rate and an increase in home good's price (prices of both goods being measured in wage units). (ii) If excess supply functions have Walrasian stability, such price changes will lead to deterioration in the balance of payments: On the other hand, devaluation-induced improvement in the balance of payments (with constant government expenditure) can lead to an improvement in real income, but reduces the labor share. (iii) If the economy is formally unstable, due to capitalists and laborers concentrating their expenditure demands respectively on the goods intensive in factor payments to themselves, then balance of payments improvement in a comparative static analysis may entail reductions in both real income and the labor share. (iv) If the additional realistic assumption is made that elasticities of excess supply functions for the two goods with respect to the interest rate are quite low, then in general improvement of all three targets (real income, balance of payments, and income distribution) will be unattainable. If in addition the government cannot finance expenditure changes by anything but money supply changes, then in general only one target variable can be attained. (v) Numerical sensitivity analysis based on Chilean data indicates that these (and other) rather pessimistic results hold for fairly wide ranges of ‘plausible’ parameter values, as long as the model's short-run Keynesian assumptions are maintained.     

Wage bargaining,trade and growth

We construct a North-South product-cycle model of trade with fully-endogenous growth and union wage bargaining. Economic growth is driven by Northern entrepreneurs who conduct R&D to innovate higher quality products. Northern production technologies can leak to the South upon successful imitation. The North has two sectors: a tradable industrial goods sector (manufacturing) where wages are determined via a bargaining process and a non-tradable sector (services) where wages are flexible. The South has only a tradable industrial goods sector where wages are flexible.We find that unilateral Northern trade liberalization, in the form of lower Northern tariffs on industrial goods, increases the rate of innovation but decreases both the bargained wage in the industrial sector and the flexible wage in the service sector. The wage effects are relative to the Southern wage rate. We also consider a variant of the model with Northern unemployment, driven by a binding minimum wage in the non-tradable service sector. In this case, Northern tariff cuts decrease the innovation rate and the bargained wage rate. In addition, the Northern unemployment rate increases. The model thus highlights the role of labor market institutions in determining the growth and labor market effects of tariff reductions. We also study the effects of unilateral Southern trade liberalization.     

International migration,non-traded goods and economic welfare in the source country: a comment

"Labor emigration redistributes income in a two factor, two good economy where one good is internationally non-traded. Labor's nominal wage rises as nominal capital payments fall. Recent research has shown that the prices of non-traded goods rise, causing society's welfare to decline. Here the induced change in the real income of each factor is considered separately. There is an ambiguity with regard to the real income of non-emigrating labor. If labor spends a relatively small fraction of income on the non-traded goods, its real income may rise, even though society suffers the loss of welfare."     

Financial liberalization,urban unemployment and welfare: some implications of the artificial low interest rate and the high wage rate policies in LDCs

This paper investigates how the low interest rate policy in the commercial banking sector affects the urban unemployment in a small open Harris-Todaro model. The rate of urban unemployment unambiguously declines. The volume of it shrinks if the rural-to-urban employment rate and the urban unemployment rate are sufficiently high relative to the wage elasticity of agricultural labor demand. The national income increases if agriculture is dominant in the domestic production. In such an economy, the “financial liberalization” advocated by the Mckinnon-Shaw school may aggravate the welfare even if it eliminates the “financial repression”.     

Environmental Goods and Measures for Their Promotion: An Analysis Using a Fair Wage Model

In this paper, we model a two‐sector small open economy with emissions and unemployment associated with the fair wage effort hypothesis, and investigate the environmental and employment impact of an emission tax, a subsidy for purchasing environmental goods in the downstream polluting industry, and a subsidy to the upstream eco‐industry. We then show that if the eco‐industry is skilled labor intensive relative to the polluting final goods industry, while a subsidy for purchasing environmental goods decreases the unemployment rate of unskilled labor, it may increase total emissions. In contrast, the emission tax and the subsidy to eco‐industry firms worsen the unemployment rate, though both policies decrease total emissions. Hence, if the emission tax is set equal to the marginal environmental damage, and either a downstream or upstream subsidy is used to mitigate unskilled unemployment, the optimal subsidy to purchase the goods is positive whereas the optimal subsidy to the eco‐industry is negative, i.e., a tax on the eco‐industry.     

Do foreigners replace native immigrants? A panel cointegration analysis of internal migration in Italy

This paper examines the impact of the immigration of foreigners on domestic labor mobility. Since David Card's seminal study on the regional labor market impact of the Mariel Boatlift it is controversial whether domestic labor mobility equilibrates economic conditions across regions. However, there is little or no evidence that natives leave destinations where migrants tend to cluster. In this paper we reconcile the existing evidence by taking another route: we analyze whether the immigration of foreigners replaces domestic mobility from poor to rich regions. We focus on Italy, which is characterized by large North-South wage and unemployment differentials, and apply panel cointegration methods. The main finding is that, conditional on unemployment and wage differentials, the presence of foreign workers in the labor force of the destination regions discourages internal labor mobility significantly. As a consequence, spatial correlation studies which use the variance of the foreigner share across regions for identifying the wage and employment effects of immigration, tend to understate the actual impact of foreign immigration.     

International migration,non-traded goods and economic welfare in a two-class economy: A reply

This paper sketches a formal model of an economy producing traded and non-traded goods in which two classes of individuals are differentiated, each owning different endowments of capital and labor and allocating different proportions of their income to the consumption of each commudity. The effects of emigration on prices, income distribution and the real income of each class is then examined.     

Strategic Regulation Policy in the Internet

Some countries are importers while others are exporters of global backbone connectivity. At the same time, input components such as local access are non-traded. This paper analyzes a non-cooperative regulatory game between importing and exporting countries, assuming that the prices of both traded and non-traded inputs can be regulated. We show that exporting countries choose a more restrictive regulation of non-traded goods than importing countries do. We further show that a requirement of international non-discrimination may hurt importing countries, and give firms producing traded inputs incentives to invest in quality degradation.     

Employment effects of stabilization policies

This paper studies the effects of a stabilization program based on a reduction in the devaluation rate in an optimizing model with capital controls, minimum wages for unskilled labor, an informal sector, and public production of intermediate inputs. Perfect mobility across sectors of the unskilled labor force prevents the emergence of unemployment for that category of labor, but skilled unemployment prevails in equilibrium. The analysis highlights the role of endogenous labor market segmentation in assessing the wage and employment effects of stabilization policies.