Skilled–unskilled wage inequality: A general equilibrium analysis

The paper develops a static three sector competitive general equilibrium model of a small open economy in which skilled labour is mobile between a traded good sector and a non-traded good sector and unskilled labour is specific to another traded good sector. The capital is perfectly mobile among all these three sectors. We examine the effects of change in different factor endowments and of globalization on skilled–unskilled wage inequality. We find that the effect of a change of a factor endowment on wage inequality depends on the factor intensity ranking between two skilled labours using sectors and on the relative strength of the marginal effects on demand for and supply of non-tradable good. We also find that a decrease in the price of the product produced by skilled (unskilled) labour using traded good sector lowers (raises) the skilled–unskilled wage inequality.     

Skilled–unskilled wage inequality,nontraded good and endogenous supply of skilled labour: A theoretical analysis

The paper develops a static four sector competitive general equilibrium model of a small open economy in which skilled labour is endogenously produced by the education sector and is mobile between a traded good sector and a nontraded good sector. Capital is also perfectly mobile among the education sector, skilled labour using traded good sector and the nontraded good sector. However, land and unskilled labour are specific to another traded good sector. We analyse the effects of change in different factor endowments and reduction in tariff rate on skilled–unskilled wage inequality. We find that the effect of a change in different parameters on wage inequality depends on the factor intensity ranking between two skilled labour using sectors and on the relative strength of the marginal effects on demand for and supply of nontraded final good. We also analyse the effects of changes in different parameters on the supply of skilled labour.     

Skilled–unskilled wage inequality,product variety,public input and increasing returns: A static general equilibrium analysis

The paper develops a four sector small open economy model with two traded final good sectors, a public intermediate good producing sector and a nontraded good sector producing varieties of intermediate goods. There are three primary factors: capital, skilled labour and unskilled labour. Industrial sector producing a traded good uses capital, intermediate goods and skilled labour as inputs. Intermediate goods producing sector also uses capital and skilled labour. Public input producing sector and the agricultural sector producing the other traded good use capital and unskilled labour as inputs. It is shown that, if production technologies are the same for the agricultural sector and the public input producing sector and if the scale elasticity of output is very low, then an increase in capital stock (unskilled labour endowment) raises (lowers) the skilled–unskilled wage ratio. However, an increase in skilled labour endowment does not produce any unambiguous effect. On the other hand, an increase in the tax rate on industrial output and/or an increase in the price of the agricultural product, armed with the same set of assumptions, lowers the skilled–unskilled wage ratio.     

Labour-market institutions, (un)employment,wages, and growth: theory and data

We analyse the implications of labour-market institutions on wage inequality in favour of skilled labour, on relative unemployment of unskilled labour, and on the economic growth rate in two clusters resulting from 27 OECD countries: Cluster 1, closely related with the Anglo-Saxon model, and Cluster 2, dominated by the Continental-European model. By linking the unskilled wage to the skilled one in Cluster 2, due to the indexation of social benefits to per-capita income, we accommodate the observed paths of the three variables in both clusters between 1991 and 2008: Cluster 1 presents a higher wage inequality in favour of skilled labour, a lower unemployment of the unskilled labour, and a better economic growth rate.     

Low level equilibrium trap,unemployment, efficiency of education system,child labour and human capital formation

This paper builds an overlapping generations household economy model to examine the impact of adult unemployment on the human capital formation of a child and on child labour, as viewed through the lens of the adult’s expectations of future employability. The model indicates that the higher the adult unemployment rate in the skilled sector, the lesser is the time allocated by an unskilled adult towards schooling of her child. We also find that an increase in the unskilled adult’s wage may or may not decrease child labour in the presence of unemployment. The model predicts that an increase in child wage increases schooling and human capital growth rate only if the adults in the unskilled sector earn less than subsistence consumption expenditure. As the responsiveness of skilled wage to human capital increases, schooling and human capital growth rates increase. The model dynamics bring out the importance of education efficiency and parental human capital in human capital formation of the child. In the case of an inefficient education system, generations will be trapped into low level equilibrium. Only in the presence of an efficient education system, steady growth of human capital is possible. Suitable policies that may be framed to escape the child labour trap are discussed as well.     

Changes in income distribution and welfare from greater immigration of unskilled workers

This paper considers the consequences of greater immigration of unskilled labor on income distribution and welfare in the receiving country. To address these issues, both the sending and receiving countries are represented in a static general equilibrium model which distinguishes between skilled and unskilled labor and which allows prices to be determined endogenously. In this framework an inflow of unskilled labor is likely to reduce wages of unskilled labor, but whether capital or skilled labor benefits depends upon demand elasticities, elasticities of substitution in production, and differences across countries in the productivity of unskilled labor. National welfare in the receiving country is likely to rise, to the extent that the relative price of importable goods falls, non-residents already in the country receive lower wages, immigrants receive lower wages than those paid to domestic workers, and immigrants cause little increased demand for public services and transfer programs.     

Gradual globalization and inequality between and within countries

Abstract.  This paper investigates the effects of gradual trade liberalization on intra‐country and inter‐country inequality. It assumes two countries, North and South, and two factors, skilled labour and unskilled labour. North is defined as the one that is relatively skilled‐labour abundant and larger. A marginal trade liberalization from autarky is shown to (a) increase (decrease) in skilled‐unskilled wage differential in the North (South) and (b) raise the inequality between North and South. As the global economy approaches free trade, a marginal trade liberalization has effects, which are the opposite of (a) and (b); that is, the relative wage falls in the North and rises in the South, and North‐South inequality decreases.     

Wage Inequality and Human Capital Formation under Migration Possibilities

I examine the problem in the relationship between wage inequality and human capital formation under migration possibilities. Unlike previous analyses, I incorporate the education market and the education price into the analysis, and assume that workers bear the pecuniary cost for receiving education. Given such an assumption, migration possibilities do not necessarily increase education demand since the larger demand for education raises the education price and lowers the net return on education. By modelling an economy where workers in the home country (the labour‐sending country) comprise skilled and unskilled workers and they can migrate to the foreign country (the labour‐receiving country), I show that brain gain and brain drain occur simultaneously in the home country. In particular, if wage inequality is larger in the foreign country than in the home country, skilled workers experience brain gain and unskilled workers experience brain drain in the home country. On the other hand, if wage inequality is sufficiently larger in the home country, brain drain occurs in skilled workers and brain gain in unskilled workers.     

TRADE IMPACTS ON SKILL ACQUISITION VIA VARIETY EXPANSION*

We show that trade enhances skill formation through gains from trade via variety expansion à la Krugman. Although workers are identical as unskilled labour, they differ in productivity as skilled labour. Workers become skilled by incurring training costs. By introducing these settings into a trade model with monopolistic competition, we show that, although trade makes all agents better off, its effect is stronger for skilled than unskilled workers, which stimulates skill acquisition. As a result of less productive workers becoming skilled, the wage dispersion among skilled workers increases.     

GROWTH AND WELFARE EFFECTS OF WORLD MIGRATION

Using a two‐bloc endogenous growth model calibrated to two generic sending and receiving countries of equal size, we assess the growth and welfare impact of world migration flows of different skill compositions. The sending country (East) has a lower total factor productivity and a lower endowment of skilled labour. Migration can induce two growth‐enhancing effects: an efficiency effect from the more efficient use of labour in the receiving country (West) and a sectoral reallocation effect from a fall in the host country skilled–unskilled wage rates. Despite growth gains, there are both winners (migrants, the representative Western non‐migrant household) and losers (the representative Eastern household remaining). Remittances can see the latter group joining the winners.     

The impact of material and service outsourcing on employment in Thailand's manufacturing industries

With increasing emphasis on the importance of outsourcing, the ‘fear of job losses’ has been of significant interest, not only in the developed countries, but also in the developing countries. In this article, we empirically investigate the impacts of intermediate inputs (material) and services outsourcing on the relative demands for skilled and unskilled labour in Thailand's manufacturing sectors from 1999 to 2003. Based on the aggregation of establishment-level data at 4-digit industrial classification, we find that both intermediate inputs and service outsourcing are relatively skill-biased. Further, our results show that intermediate inputs outsourcing has negative impacts on the relative demands for skilled and unskilled workers, whereas service outsourcing shifts the demand towards skilled workers at the expense of unskilled workers.     

TECHNOLOGICAL CHANGE, INEQUALITY AND WORK SHARING

The effects of technological change on wage inequality are usually studied under the assumption of exogenous supplies of skilled and unskilled workers. Moreover, in these studies there is no distinction between the stock (number of workers) and the flow (hours of work) dimension of labour services. In the present paper, we construct a model in which hours of work and technological change affect both the (relative) demand and supply of unskilled workers. The labour supply of unskilled workers (numbers of persons) is derived from a model of household labour supply in which households differ regarding the disutility suffered when both household members work. Combining together the (relative) supply and demand parts of the model we are able to establish technological change (either biased or neutral) as a plausible explanation of recent trends in wage inequality.     

The impact of foreign direct investment on the relative return to skill

Since the early 1980s, China has adopted favourable economic policies to attract FDI in order to facilitate technology development. Since inward FDI induces either sector‐ or factor‐biased technical progress, the impact of FDI on the distribution of income between skilled and unskilled labour is not trivial. This paper introduces vertical product differentiation to analyze the impact of FDI on the return to skill and concludes that, for a labour abundant country, this impact depends on whether the FDI‐induced technology transfer is skill‐ or labour‐biased, regardless of which sector receives FDI. The analysis shows that FDI with relatively labour‐biased technology will decrease the wage gap while FDI with relatively skill‐biased technology will increase the profit margin of the host country’s exports as well as its wage gap. The findings provide policy insights for FDI recipient countries in balancing wage growth between skilled and unskilled workers by managing inward FDI with relatively labour‐biased and skill‐biased technologies. This is particularly important for China given the expected further increase of inward FDI following its imminent membership of the WTO. JEL classification: F23, J31, P33.     

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.     

An Analysis of Income Distribution between the North and the South: the Grossman–Helpman and Lai Results Re‐examined*

This paper studies the effects of labor supply on relative wages in a dynamic North–South model of trade. Lai (1995 )—a generalization of the Grossman and Helpman (1991a,b , ch. 11) models—showed that the relative wage of skilled (unskilled) labor in a region is positively (negatively) related to the supply of skilled (unskilled) labor in that region. These surprising results depend crucially on the specification of the functional form of the Southern imitation activity. We will show that these results (except for the relative wage of unskilled labor in Lai) are reversed in the case where the productivity of imitation depends only on the number of products the North manufactures.     

How Segmented are Skilled and Unskilled Labour Markets: the Case of Beveridge Curves

This paper tests whether there is evidence that two distinct Beveridge curves for the skilled and unskilled aggregate markets exist. The results support the hypothesis and specifically find that the unskilled labour segment is less efficient at matching workers with jobs, primarily due to higher labour turnover rates. Higher turnover rates can be indicative of a poor match between employers' and jobseekers' expectations. The results also indicate that other shift variables, such as the replacement rate, the incidence of long-term unemployment, the immigration rate and the market circumstances in the skilled segment were only important for the unskilled segment.     

Shifts and twists in the relative productivity of skilled labor

Skill-biased technical change is usually interpreted in terms of the efficiency parameters of skilled and unskilled labor. This implies that the relative productivity of skilled workers changes proportionally in all tasks. In contrast, we argue that technical changes also affect the curvature of the distribution of relative productivity. Building on Rosen (1978) [Rosen, S., 1978. Substitution and the division of labor. Economica 45, 235–250] tasks assignment model, this implies that not only the efficiency parameters of skilled and unskilled workers change, but also the elasticity of substitution between skill types of labor. Using data for the United States between 1963 and 2002, we find significant empirical support for a decrease in the elasticity of substitution at the end of the 1970s followed by an increase at the beginning of the 1990s. This pattern of the elasticity of substitution has contributed to the labor productivity slowdown in the mid-1970s through the 1980s and to a speedup in the 1990s.     

Cross-Country Externalities of Trade and FDI Liberalization

We develop a three-country heterogeneous-firm model and show that FDI liberalization in one foreign country (F1) results in the following: (i) some firms from the home country switch from export to FDI in F1; (ii) skilled labor’s wage rate drops in the home country; (iii) wage inequality between the skilled and unskilled labor decreases; and (iv) some firms from the home country switch from FDI to export to another foreign country (F2). The effects from trade liberalization are just the opposite, but the effects from education improvement are qualitatively the same as FDI liberalization. The cross-country externalities work through the domestic labor market.     

FOREIGN DIRECT INVESTMENT,NON‐TRADED GOODS AND REAL WAGES

Using a three‐sector general equilibrium model with non‐traded goods, we investigate the impact of foreign direct investment on the real wages of skilled and unskilled workers. We show that foreign direct investment increases the real wages of skilled and unskilled workers alike, but widens the gap between the two under plausible conditions.     

We Can Work It Out: The Impact of Technological Change on the Demand for Low-Skill Workers

There is little doubt that technology has had the most profound effect on altering the tasks that we humans do in our jobs. Economists have long speculated on how technical change affects both the absolute demand for labour as a whole and the relative demands for different types of labour. In recent years, the idea of skill‐biased technical change has become the consensus view about the current impact of technology on labour demand, namely that technical change leads to an increase in the demand for skilled relative to unskilled labour painting a bleak future for the employment prospects of less‐skilled workers. But, drawing on a recent paper by Autor, Levy and Murnane (2003) about the impact of technology on the demand for different types of skills, this paper argues that the demand in the least‐skilled jobs may be growing. But, it is argued that employment of the less‐skilled is increasingly dependent on physical proximity to the more‐skilled and may also be vulnerable in the long‐run to further technological developments.