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Fair Wage Hypothesis, Foreign Capital Inflow and Skilled-unskilled Wage Inequality in the Presence of Agricultural Dualism

Sarbajit Chaudhuri ()

MPRA Paper from University Library of Munich, Germany

Abstract: The paper develops a four-sector general equilibrium model where the fair wage hypothesis is valid and there is agricultural dualism for analyzing the consequence of an inflow of foreign capital on the skilled-unskilled wage inequality and the unemployment of skilled labour in a developing economy. The unskilled workers are fully employed but there is imperfection in the market for unskilled labour. On the contrary, the skilled wage is set by the firms by minimizing the unit cost of skilled labour and their efficiency depends on the relative income distribution and the unemployment rate. The analysis finds that an inflow of foreign capital worsens the relative wage inequality but lowers the unemployment of skilled labour. It provides an alternative theoretical foundation to the empirical finding that inflows of foreign capital might have produced unfavourable effect on the wage inequality in the developing countries during the liberalized regime by increasing the relative demand for skilled labour.

Keywords: Fair wage hypothesis; agricultural dualism; skilled labour; unskilled labour; relative wage inequality; foreign capital; unemployment (search for similar items in EconPapers)
JEL-codes: F13 J41 O15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-lab
Date: 2008-06-23
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