Preference shifts and wage inequality

Jiancai Pi and Xiangyu Huang

The Journal of International Trade & Economic Development, 2022, vol. 31, issue 5, 759-782

Abstract: This paper analyzes how preference shifts affect wage inequality. We take the Cobb–Douglas preference, the Dixit-Stiglitz preference and the quasi-linear preference into account, and find that there exists preference-driven wage inequality. In the two-type labor (i.e. skilled labor and unskilled labor) models, when the preferences of consumers for skilled products are strengthened, wage inequality will be widened (resp. narrowed down) if there is a relatively low (resp. high) capital intensity in the unskilled sector. We also build a three-type labor (i.e. high-skilled labor, medium-skilled labor, and unskilled labor) model and a model with a non-tradable unskilled sector to strengthen the explanatory power. The role of preferences shifts in changing wage inequality is overlooked by the existing literature.

Date: 2022
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DOI: 10.1080/09638199.2021.2022177

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