Trade, foreign investment, and wage inequality in developing countries

Alessandro Cigno

IZA World of Labor, 2015, No 193, 193

Abstract: Liberalization of foreign trade and investment raises the domestic ratio of skilled to unskilled wages (skill premium) if the country has a sufficiently well-educated workforce, but lowers it otherwise. Wide wage inequality is undesirable on equity grounds, especially in poor countries where the bottom wage is close to the breadline; but it gives parents an incentive to invest in their children’s education. The incentive will be ineffective, however, if parents cannot borrow for their child’s education because of underdeveloped credit markets or because they are too poor to finance the investment from their own income and savings.

Keywords: trade openness; offshoring; skill endowments; skill premium (search for similar items in EconPapers)
JEL-codes: F16 J24 (search for similar items in EconPapers)
Date: 2015
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