Trade tariff, wage gap and public spending

Michele Giuranno and Antonella Nocco

Economic Modelling, 2020, vol. 91, issue C, 167-179

Abstract: This paper studies the interplay between wage gap and government spending in a small open economy facing a shock in trade policy. We consider a specific factor model with an export sector, which uses skilled labour, and an import-competing sector, which uses unskilled labour. We find the conditions under which there exists an inverse (direct) relation between trade liberalization (protection), which increases (decreases) the skilled-unskilled wage gap, and the level of government expenditure. We also show how either an unbalanced distribution of political bargaining power, or tariff revenue co-financing public spending may break this inverse relation. Moreover, the direct relation between tariff protection and public goods provision can be strenghtened by progressive taxation and weakened by regressive taxation.

Keywords: Wage gap; Trade liberalization; Positive political economy (search for similar items in EconPapers)
JEL-codes: F15 F16 H5 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Trade Tariff, Wage Gap and Public Spending (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:91:y:2020:i:c:p:167-179

DOI: 10.1016/j.econmod.2020.05.029

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