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Capital Market Distortion, Firm Dynamics and Wage Inequality

Author

Listed:
  • Beladi, Hamid

    (College of Business, University of Texas at San Antonio)

  • Chao, Chi-Chur

    (Department of Economics, Deakin Business School, Deakin University)

  • Ee, Mong Shan

    (Department of Finance, Deakin Business School, Deakin University)

Abstract

This paper examines the short- and long-run effects of capital market distortion on income distribution and social welfare in a developing dual economy. In addition to capital market distortion, we also consider the distortion that exists in the labor market. In particular, wage inequality is a consequence of the labor market distortion. The capital market distortion can lead to capital misallocation, which further affects the factor returns in the economy. We find that in the short run, a rise in the capital market distortion in favor of the urban firms do not yield a significant impact on wage inequality. However, the preferential policy on lower capital costs to the urban firms can attract new entry to the urban sector, which could raise skilled wages through an increase in the demand for skilled labor, but lower unskilled wages by substituting capital for unskilled labor. Thus, the existence of the capital market distortion can contribute to wage inequality in the economy via firm dynamics.

Suggested Citation

  • Beladi, Hamid & Chao, Chi-Chur & Ee, Mong Shan, 2016. "Capital Market Distortion, Firm Dynamics and Wage Inequality," RIEI Working Papers 2016-05, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration.
    • Handle: RePEc:xjt:rieiwp:2016-05
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    File URL: http://58.210.89.21/RePEc/xjt/working-papers/RIEI-WP_2016-05.pdf
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    References listed on IDEAS

    as
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    2. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    3. Ronald W. Jones, 2018. "The Structure of Simple General Equilibrium Models," World Scientific Book Chapters, in: International Trade Theory and Competitive Models Features, Values, and Criticisms, chapter 4, pages 61-84, World Scientific Publishing Co. Pte. Ltd..
    4. Chao, Chi-Chur & Yu, Eden S. H., 1992. "Capital markets, urban unemployment and land," Journal of Development Economics, Elsevier, vol. 38(2), pages 407-413, April.
    5. Zheng (Michael) Song & Guiying (Laura) Wu, 2013. "A Structural Estimation on Capital Market Distortions in Chinese Manufacturing," Economic Growth Centre Working Paper Series 1306, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    6. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
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    Cited by:

    1. Emmanuel Saez, 2017. "Questions And Answers: Income And Wealth Inequality—Evidence And Policy Implications," Contemporary Economic Policy, Western Economic Association International, vol. 35(1), pages 26-28, January.
    2. Boehl, Gregor & Fischer, Thomas, 2017. "Capital Taxation and Investment: Matching 100 Years of Wealth Inequality Dynamics," Working Papers 2017:8, Lund University, Department of Economics.

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    More about this item

    Keywords

    Capital market distortion; firm entry; wage inequality; developing economies;
    All these keywords.

    JEL classification:

    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

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