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

Manash Gupta () and Priya Dutta

Economic Modelling, 2012, vol. 29, issue 2, 502-513

Abstract: 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.

Keywords: Skilled labour; Unskilled labour; Wage inequality; Public input; External economics; Increasing returns; Product variety (search for similar items in EconPapers)
JEL-codes: F13 F22 J31 O15 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:2:p:502-513

DOI: 10.1016/j.econmod.2011.12.010

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