Input trade reform and wage inequality

Abstract

This paper, using a general equilibrium model of production and trade for a developing country with non-traded goods, dual unskilled labour markets and internationally fragmented skillintensive production, illuminates how liberalised input trade affects the unskilled wages prevailing in the informal sectors and employment conditions in those sectors. Numerical analysis further highlights importance of the elasticities of factor substitution in production of different sectors to determine the movement in informal wage and therefore the movement in skilled–unskilled wage gap. These results are consistent with the empirical evidence on developing countries (like India) that suggests liberalisation-inequality relationship cannot be explained by focusing on tradable goods alone.