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2022 | OriginalPaper | Chapter

Trade, Unemployment and Inequality in Product Variety Models—An Analytical Survey

Authors : Sugata Marjit, Meghna Dutta

Published in: Studies in International Economics and Finance

Publisher: Springer Singapore

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Abstract

There have been a significant body of theoretical and empirical work done on the effects of trade on employment and wage inequality. However, a close study of the extant literature shows that most of the work has been done within the aegis of factor-biased and sector-biased effects of factor returns due to trade. Specific factor market characteristics of the countries and their interaction owing to their trade linkages have not been explicitly studied especially in a trade model with product variety. In this work, apart from extensively discussing the literature on each of these aspects, we trace out briefly the impact of trade, entrepreneurial finance and presence of a fixed minimum wage policy on wage inequality in a one-sector Krugman-type model.

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Openness of trade helps international knowledge spillovers, which in turn raises the relative demand for skilled labour and pushes up wage inequality in developing countries. New technologies obtained using skilled workers diffuse to the less-skilled workers to some extent resulting in an increase in the demand for less-skilled labour. The net effect of these two kinds of knowledge spillovers on the equilibrium wage inequality in the developing country is the skill discrepancy effect.

In a relatively unskilled-labour abundant country, openness of trade can lead to a decrease in wage premium. This is called price effect.

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Title: Trade, Unemployment and Inequality in Product Variety Models—An Analytical Survey
Authors: Sugata Marjit
Meghna Dutta
Publisher: Springer Singapore
Book: Studies in International Economics and Finance
Print ISBN: 978-981-16-7061-9

Electronic ISBN: 978-981-16-7062-6

Copyright Year: 2022
DOI: https://doi.org/10.1007/978-981-16-7062-6_16