Urban Development, Excessive Entry of Firms and Wage Inequality in Developing Countries

Hamid Beladi, Chi-Chur Chao, Mong Shan Ee and Daniel Hollas
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Mong Shan Ee: Asian Development Bank Institute
Daniel Hollas: Asian Development Bank Institute

No 653, ADBI Working Papers from Asian Development Bank Institute

Abstract: We examine the short- and long-term effects of urbanization, via favorable urban development policies, on income distribution and social welfare for a developing country. The urban manufacturing sector is characterized by imperfect competition and free entry. Urbanization shifts rural workers to the highly productive urban sector, while causing production in urban firms to expand because of scale economies. However, urbanization may worsen wage inequality between skilled and unskilled labor in the short term. In the long term, urbanization can attract new firms to the urban sector, and favorable urban development policies may result in excessive entry of firms, which can amplify wage inequality in the economy. This entry-amplifying effect is confirmed empirically, especially for low- and lower-middle-income countries. If the entry effect is not considered, the impact of urbanization on wage inequality could be understated by 18% for low- and lower-middle-income countries.

Keywords: urbanisation; firm entry; wage inequality; developing economies (search for similar items in EconPapers)
JEL-codes: J31 R23 R58 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2017-01-31
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (2)

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Journal Article: Urban development, excessive entry of firms and wage inequality in developing countries (2020)
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