Skilled-Unskilled Wage Inequality and Urban Unemployment

11 Pages Posted: 15 Sep 2010

See all articles by Hamid Beladi

Hamid Beladi

University of Texas at San Antonio - College of Business - Department of Economics

Avik Chakrabarti

UWM; University of Wisconsin - Milwaukee

Sugata Marjit

Centre for Studies in Social Sciences, Calcutta; Indian Institute of Foreign Trade; City University of Hong Kong (CityU) - Department of Economics & Finance

Abstract

The impact of trade liberalization on the labor market in the North has drawn tremendous attention in the face of the growing skilled-unskilled wage gap but in the South it has been somewhat neglected. One of the key structural differences between the North and the South is that the South experiences a pronounced rural-urban migration in the presence of urban unemployment. We introduce this feature in the structure of a simple general equilibrium model to analyze the effects of trade liberalization and fragmentation on employment and the skilled-unskilled wage differential in the South. In particular, we show that while fragmentation necessarily improves the unskilled wage and the skilled wage, more lucrative global opportunities for the skilled final product, in the absence of fragmentation, can reduce the rural wage and increase urban unemployment. The effect of fragmentation, ceteris paribus, on the skilled-unskilled wage gap is sensitive to the degree of substitutability between land and unskilled labor. As such, fragmentation can magnify the increase in the skilled-unskilled wage gap resulting from an improvement in the terms of trade. It is also shown that a technological progress in the intermediate goods sector increases the skilled-unskilled wage gap and raises urban unemployment.

JEL Classification: F1, O1, F11, F12

Suggested Citation

Beladi, Hamid and Chakrabarti, Avik and Chakrabarti, Avik and Marjit, Sugata and Marjit, Sugata, Skilled-Unskilled Wage Inequality and Urban Unemployment. Economic Inquiry, Vol. 48, No. 4, pp. 997-1007, October 2010, Available at SSRN: https://ssrn.com/abstract=1677130 or http://dx.doi.org/10.1111/j.1465-7295.2009.00247.x

Hamid Beladi (Contact Author)

University of Texas at San Antonio - College of Business - Department of Economics ( email )

One UTSA Circle
P.O. Box 5636
San Antonio, TX 78249
United States
210-458-7038 (Phone)
210-458-7040 (Fax)

Avik Chakrabarti

UWM ( email )

836 Bolton Hall
Milwaukee
Milwaukee, WI Milwaukee 53818
United States

University of Wisconsin - Milwaukee

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States

Sugata Marjit

Centre for Studies in Social Sciences, Calcutta ( email )

R 1, B.P. Township
Kolkata, West Bengal, India
Kolkata, West Bengal 700094
India

Indian Institute of Foreign Trade ( email )

New Delhi
QUTUB INSTITUTIONAL AREA
NEW DELHI, 110016
India

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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