Capital Market Distortion, Firm Dynamics and Wage Inequality

Hamid Beladi, Chi-Chur Chao and Mong Shan Ee ()
Additional contact information
Mong Shan Ee: Department of Finance, Deakin Business School, Deakin University

No 2016-05, RIEI Working Papers from Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration

Abstract: This paper examines the short- and long-run effects of capital market distortion on income distribution and social welfare in a developing dual economy. In addition to capital market distortion, we also consider the distortion that exists in the labor market. In particular, wage inequality is a consequence of the labor market distortion. The capital market distortion can lead to capital misallocation, which further affects the factor returns in the economy. We find that in the short run, a rise in the capital market distortion in favor of the urban firms do not yield a significant impact on wage inequality. However, the preferential policy on lower capital costs to the urban firms can attract new entry to the urban sector, which could raise skilled wages through an increase in the demand for skilled labor, but lower unskilled wages by substituting capital for unskilled labor. Thus, the existence of the capital market distortion can contribute to wage inequality in the economy via firm dynamics.

Keywords: Capital market distortion; firm entry; wage inequality; developing economies (search for similar items in EconPapers)
JEL-codes: L52 O18 R58 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2016-07-24
New Economics Papers: this item is included in nep-cse
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://58.210.89.21/RePEc/xjt/working-papers/RIEI-WP_2016-05.pdf First version, 2016 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:xjt:rieiwp:2016-05

Access Statistics for this paper

More papers in RIEI Working Papers from Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration Contact information at EDIRC.
Bibliographic data for series maintained by Paulo Regis ().