Trade tariff,wage gap and public spending |
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| Institution: | 1. Dipartimento di Scienze Dell’Economia, Università Del Salento, Complesso Ecotekne, Strada per Monteroni, 73100 Lecce, Italy;2. Research Fellow at CESifo (Center for Economic Studies and the Ifo Institute), Munich and Dipartimento di Scienze Dell’Economia, Università Del Salento, Complesso Ecotekne, Strada per Monteroni, 73100 Lecce, Italy;1. Department of Management, Università Politecnica delle Marche, Ancona, Italy;2. Department of Economics and Social Science, Università Politecnica delle Marche, Ancona, Italy;1. Department of Financial Engineering, Ajou University, Suwon, 16499, Republic of Korea;2. Department of Applied Mathematics & Institute of Natural Science, Kyung Hee University, Yongin, 17104, Republic of Korea;3. Department of Mathematical Sciences, Seoul National University, Seoul, 08826, Republic of Korea;1. CREM UMR 6211, Université de Caen Normandie, France;2. ICN Business School-CEREFIGE, Nancy, France |
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| Abstract: | This paper studies the interplay between wage gap and government spending in a small open economy facing a shock in trade policy. We consider a specific factor model with an export sector, which uses skilled labour, and an import-competing sector, which uses unskilled labour. We find the conditions under which there exists an inverse (direct) relation between trade liberalization (protection), which increases (decreases) the skilled-unskilled wage gap, and the level of government expenditure. We also show how either an unbalanced distribution of political bargaining power, or tariff revenue co-financing public spending may break this inverse relation. Moreover, the direct relation between tariff protection and public goods provision can be strenghtened by progressive taxation and weakened by regressive taxation. |
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| Keywords: | Wage gap Trade liberalization Positive political economy F15 F16 H5 |
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