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Wage Inequality and Unemployment in the Presence of Imported Intermediate Goods: A Theoretical Analysis

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  • Priya Brata Dutta
  • Nirjhar Ghosh

Abstract

This article develops a static three-sector and five-factor competitive general equilibrium model of a small open economy: sector 1 is the rural agricultural sector, which produces products using informal or unorganised unskilled labour and land as inputs; sector 2 is the urban manufacturing, final-goods-producing sector that produces products with the help of unskilled labour, who get unionised wages, and capital; and sector 3 is the service sector, which uses skilled labour with formal wages, capital and sophisticated hi-technology-intensive imported intermediate goods produced abroad as inputs. We show that an exogenous increase in capital inflow or an increase in tariff on imported intermediate input reduces the skilled–unskilled wage inequality and lowers unemployment as long as the return to capital is unaltered and output adjustments absorb the entire shock of the two policies. Such capital inflow increases rural wage and reduces unemployment via the Harris Todaro mechanism but interestingly does not allow the skilled wage to increase. Thus, two critical policy targets can be accommodated at the same time. JEL Codes: F13, J31, J46

Suggested Citation

  • Priya Brata Dutta & Nirjhar Ghosh, 2021. "Wage Inequality and Unemployment in the Presence of Imported Intermediate Goods: A Theoretical Analysis," Foreign Trade Review, , vol. 56(4), pages 375-399, November.
    • Handle: RePEc:sae:fortra:v:56:y:2021:i:4:p:375-399
    DOI: 10.1177/0015732520986893
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    More about this item

    Keywords

    Wage inequality; skilled labour; unskilled labour; input trade reform; general equilibrium; unemployment;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market

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