Explanation of growing income inequality is one of the important recent research areas in Development Economics. The conventional belief is that globalization leads to an improvement in welfare both from the aggregative and distributive perspectives. However, with regard to its distributive effect, many empirical works point out that skilled unskilled wage income inequality has grown up in various developed and developing countries. Different studies offer different explanations for this phenomenon; and trade liberalization and technological progress are the main two controversial reasons of this phenomenon. Many empirical studies also point out other causes like international outsourcing, increase in the price of skill intensive good, entry of unskilled labour surplus low income countries in the international market etc.
According to the conventional theory, developed and less developed countries, who generally play opposite roles on international factor movements and face opposite type of changes in the relative price structure of traded goods due to trade liberalisation, should face opposite movements in the degree of skilled unskilled wage inequality. However, empirical data show that both these groups of countries have experienced an increase in the degree of wage inequality. There exists a theoretical literature dealing with the issue of this growing wage inequality and trade liberalization; and it is based on the framework of static competitive general equilibrium models with two different types of labour skilled and unskilled. The ratio of the wage rate of the skilled worker to that of the unskilled worker is taken as the measure of wage inequality in these models.
We can divide the existing theoretical literature into two groups. One group of models assumes full employment of both type of labour and this group includes works of Yabuuchi and Chaudhuri (2009, 2007), Chaudhuri and Yabuuchi (2008, 2007), Marjit and Acharyya (2006) , Marjit and Acharyya (2003) , Marjit and Kar (2005), Marjit et. al. (2004) and Kar and Beladi (2004) etc. However, only Chaudhuri and Yabuuchi (2008) and Marjit and Acharyya (2003) introduce non-traded goods in their models; and assume it to be produced by unskilled labour. Hence, these models can not analyze the role played by the mobility of skilled labour between the traded good sector and the non-traded good sector on the skilled unskilled wage inequality.
Another small group of models consider Harris-Todaro (1970) type unemployment of unskilled labour; and this group includes works of Marjit and Acharyya (2003), Beladi et. al. (2008) and Chaudhuri (2008, 2004). However, these models assume full employment of skilled labour. Chaudhuri and Banerjee (2010) explain unemployment of skilled labour with the help of efficiency wage hypothesis9 and unemployment of unskilled labour using Harris-Todaro (1970) migration mechanism. However, they do not consider non-traded good.
Skilled-Unskilled Wage Inequality and Unemployment: A General Equilibrium Analysis
