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Chapter 13 Trade, Wage Inequality and the Vent for Surplus

In: Contemporary and Emerging Issues in Trade Theory and Policy

Author

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  • Brati Sankar Chakraborty
  • Abhirup Sarkar

Abstract

Most models attempting to give an account of trade-induced symmetric increase in wage inequality have abandoned the factor price equalization (FPE) framework. The present chapter retains the FPE framework and identifies a plausible route through which trade might increase wage inequality in all trading countries. A two-sector model with one constant returns sector producing basic goods and another increasing returns to scale sector producing fancy goods is developed. A quasi-linear utility function is used to capture the divide between basic and fancy goods. There are two types of productive factors, skilled and unskilled labour, and they differ with respect to their occupational options. Skilled labour can work both in the skill using fancy goods sector and in the unskilled labour using basic good producing sector, whereas unskilled labour is tied down to unskilled job. The model holds possibilities of multiple equilibria and under reasonable parameterization skill premium increases in all countries following trade.

Suggested Citation

  • Brati Sankar Chakraborty & Abhirup Sarkar, 2008. "Chapter 13 Trade, Wage Inequality and the Vent for Surplus," Frontiers of Economics and Globalization, in: Contemporary and Emerging Issues in Trade Theory and Policy, pages 251-273, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:fegzzz:s1574-8715(08)04013-x
    DOI: 10.1016/S1574-8715(08)04013-X
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