Skilled-unskilled wage inequality and urban unemployment.

Beladi, Hamid ; Chakrabarti, Avik ; Marjit, Sugata 等

I. INTRODUCTION

An extensive body of literature has looked at possible effects of trade liberalization on the labor market in the North. The effects on the labor market in the South have not drawn as much attention. Conventional wisdom, associated with the Stolper-Samuelson theorem, predicts a gradual reduction of skilled-unskilled wage inequality in the South. However, recent studies on Latin American countries exhibit conflicting patterns. Wood (1997) summarizes the empirical findings citing a series of articles by Robbins (1995a, 1995b, 1996a, 1996b) that convincingly demonstrate that Latin America has experienced an increasing wage gap between the skilled and the unskilled following a more open trade and investment regime. While globalization-induced changes in production patterns and the consequent increase in the demand for skilled labor relative to unskilled labor has often been cited as the root cause of wage inequality, there has been no general agreement over the possible source of such increased demand for skilled labor. The debate among economists on this has followed two broad paths, one relying on technological changes and the other on trade and investment. While technological change may have played a key role in the widening wage gap in the industrialized countries, there is strong evidence (Robbins 1994a, 1994b, 1995a, 1995b, 1996a, 1996b; Robbins and Zveglich 1995; Wood 1997) indicating the dominant influence of trade and investment on wage inequality in the developing economies.

The implications of a more open trade and investment regime need to be analyzed in terms of frameworks that explicitly take into account the structural features of labor markets in the South. One of the key structural differences between the North and the South is that the South experiences a pronounced rural-urban migration in the presence of urban unemployment (Basu 1997; Ray 1998). The goal of our paper was to capture this feature within the structure of a simple general equilibrium model in an effort to understand the effect of fragmentation on the skilled-unskilled wage differential and employment in the South.

The rest of the paper is organized as follows. The next section places this paper in the context of the relevant literature. Section III describes the general equilibrium model with the possibility of fragmentation and unemployment. Section IV compares and contrasts the impact of trade and endowment on the skilled-unskilled wage gap and employment with and without fragmentation. Section V concludes.

II. CONTEXT

The motivation of this paper stems from our view that the southern experience does not necessarily contradict conventional wisdom, as has been claimed in Wood (1997), but points to the need for parsimonious yet meaningful modifications of the structure of general equilibrium models, from which the wisdom is derived, to properly reflect the salient structural features of the South.

On the one hand, production fragmentation has become an important facet of globalization in modern times. (1) Sharp declines in transportation and communication costs have encouraged this process of "slicing the value chain" that is evident in international trade data. This has been sustained by various regional integration agreements that have reduced the barriers to international trade and investment as well as important technical innovations in telecommunications and information technology that have facilitated the coordination of international production networks. This advanced stage in the international division of the chain of production has brought a fundamental change in the nature of international trade as goods increasingly cross multiple national borders while they are in process.

Several authors, such as Jones, Kierzkowski, and Lurong (2005), Wan (2005), Long (2005), Jones and Kierzkowski (1998), Jones and Marjit (2001), Arndt (1998), Feenstra (1998), Harris (1998), Hummels, Rapoport, and Yi (1998), Feenstra and Hanson (1996b), and Dixit and Grossman (1982) have analyzed the role of "fragmentation" in world trade. Although the process of fragmentation is not new, it has appeared more frequently in the recent literature on international trade since rapid technological transformations have made international coordination of fragmented production increasingly feasible. While the term "fragmentation" was coined by Jones and Kierzkowski (1998), several other terms have been used in the literature to highlight specific features of the process of fragmentation including "internationalization" (Grossman and Helpman 1999), "disintegration" (Feenstra 1998), "intraproduct specialization" (Arndt 1998), "vertical specialization" (Hummels, Rapoport, and Yi 1998), "subcontracting" and "outsourcing" (Feenstra and Hanson 1996b), and "multistage production" (Dixit and Grossman 1982).

On the other hand, it is rather conspicuous that in the entire debate on trade and wage inequality, but for a handful of studies by Feenstra and Hanson (1996a), Marjit (1991, 2003), Marjit and Acharyya (2003), and Kimura and Ando (2005), there has been a dearth of analyses that specifically incorporate the structural features of the South. In an elegant piece, Feenstra and Hanson (1996a) modeled the effect of an increase in the capital stock in the South relative to the North or a neutral technological progress in the South on the skilled-unskilled wage dispersion. Marjit (2003) analyzed the consequences of liberal economic policies on informal wage in a general equilibrium model with formal-informal labor markets, wage differential, vertical linkage, and restricted capital movement. Marjit and Acharyya (2003) direct our attention to segmented labor markets of the third world in search of an explanation of the rising wage inequality across trading nations. Kimura and Ando (2005) have constructed a model of two-dimensional (in terms of geographical distance and controllability of a firm for fragmented production processes) fragmentation and empirically analyses the international production/distribution networks.

All of these contributions focus on full-employment (2) models. One of the most important structural differences between the North and the South is the distribution of the population between rural and urban areas. Urban population growth in the South is far more rapid than the overall growth in population, and more than half of this urban growth is accounted for by migrants from the rural areas. Moreover, while all economies display some amount of unemployment, it is particularly pronounced in the South where there exists rural-urban migration in the presence of urban unemployment. During the last decade, high-income developed countries exhibited an average annual growth of urban population by 0.8% compared to the overall population growth of 0.6% per year. The picture is quite the opposite in the South. For the 45 low-income countries covered by the World Bank, urban population growth was nearly double that of overall population growth: the average rate of urban population growth was 3.9% per year, while the average rate of population growth was 2% per year for the same group of countries. For the 63 countries classified as middle income by the Bank, the urban population growth rate was 2.8% per year compared to the overall population growth rate of 1.7% per year. This has been an outcome of both a "push" from the rural agricultural base and the perceived "pull" from the urban sectors. See Table 1 for representative figures on Latin America. By capturing the feature of rural-urban migration in the presence of urban unemployment (a la Harris-Todaro), our paper complements the literature cited above in a clearly distinctive way: it enriches the process of commodity market and factor market interactions that resemble the southern experience. See Table 1 for representative figures on Latin America.

The link between unemployment and rural-urban migration has attracted enormous attention dating back to Todaro (1969) and Harris and Todaro (1970). Theft work took the view that labor migrates wherever its expected income is relatively high: hence, in equilibrium, expected incomes--at least for relevant workers--must be equated between urban and rural employment. Since urban wages are invariably higher than rural wages, the equilibration of income occurs with the existence of unemployed or underemployed urban labor. The predictions of the Harris-Todaro model have been repeatedly validated in empirical tests (see Barnum and Sabot 1975; Cole and Sanders 1983; Todaro 1976a, 1976b) and has been widely applied to investigate various developmental issues and to evaluate alternative policies (see Beladi and Marjit 1996; Beladi and Ingene 1994; Bhagwati and Srinivasan 1974; Bhatia 1979; Corden and Findlay 1975; Das 1982; Jha and Lachler 1981; Marjit 1991; Marjit and Beladi 2003; Robertson and Wellisz 1977).

The present paper argues that a rise in the international price of the skilled final product and acquisition of a cheaper intermediate from the global market will have drastically different implications for the unskilled (rural) wage. While fragmentation necessarily improves the unskilled wage and the skilled wage, more lucrative global opportunities for the skilled final product, in the absence of fragmentation, can reduce the rural wage and increase urban unemployment.

III. MODEL

A major deficiency of most theories used to explain wage movements in the South is that the pattern of trade and comparative advantage are often much more complex than what the theories suggest. (3) To measure an aggregate index of skill or capital content of exports to assert the relative factor abundance hypothesis in its starkest form may not help us to identify the reason behind and pattern of factor price movements since it fails to capture the diverse trade pattern. For example, India and China both are major exporters of primary products, as well as software services. In fact, the software exports are the fastest-growing exports in India. And, India with its vast land and unskilled population continues to be a major agricultural nation. Historically, most Latin American countries had engaged in an import substitution industrialization strategy as a response to the collapse of the international trading system during the Great Depression. During the 1930s and 1940s, industrial growth was led by few industries (e.g., beverages, oil derivatives, nonmetallic minerals, and textiles). Since the early 1950s, a second phase of import substitution started with a focus on industries including paper and printing, chemicals and rubber, basic metals, and metal products. Currently, the major exporters in the region (Table 2) export goods that are highly skill intensive including computer equipment, medical equipment, optical instruments, medical instruments, photographic equipment, optical fiber, telecommunication equipment, electric power transmission equipment, electrical circuit equipment, electrical distribution equipment, as well as goods that have a relatively low skill content, for example, agricultural produce, spices, tobacco, wood, pulp, chemicals, footwear, etc. It is also interesting to note that India as well as the Latin American countries import intermediate goods to be used along with skilled labor to produce exportable goods. This is quite evident, for instance, in a recent paper by Bender and Li (2001) where they have examined the patterns of trade and comparative advantage for East Asian (Japan, Hong Kong, South Korea, Singapore, Indonesia, Malaysia, Philippines, and Thailand) and Latin American (Argentina, Chile, Colombia, Peru, Mexico, Venezuela, Bolivia, and Ecuador) economies.

To capture the idea that an economy can export skilled as well as unskilled products, (4), (5) consider a small open economy producing four goods: agricultural export good (X), importable good (Y), skilled exportable good (Z), and a nontraded good (M), which is an (intermediate) input used in the skilled export good sector. There are four inputs: skilled labor (S), unskilled labor (L), land (T), and capital (K), which are all in fixed supply.

The rural area produces the agricultural product with unskilled labor (earning rural unskilled wage (w)) and land. The unskilled manufacturing sector represents the import-competing segment of this economy, which uses unskilled labor (earning a minimum wage [bar.w]) and capital. The nontraded intermediate good uses skilled labor and capital. The skilled exportable good uses skilled labor and the intermediate input. The production functions exhibit constant returns to scale and diminishing marginal productivities. Markets are perfectly competitive. The following symbols are used in generating the equations used in the system: [bar.w], urban minimum unskilled wage; [w.sub.s], skilled wage; w, rural unskilled wage; (6) r, return to capital; R, rent on land; [P.sub.i], price of the ith product i, x, m, y, z; [a.sub.ij] s are the usual input-output coefficients.

Migration takes place from the flexible-wage rural sector to the unskilled fixed-wage urban sector. The migration rule follows the standard Harris-Todaro property. Rural workers cannot migrate to the skilled sectors that have market-determined skilled wage [w.sub.s] > [bar.w], the fixed urban unskilled wage.

Figure 1 captures the incentive for fragmentation, that is, accessing the cheaper intermediate good from abroad. In the absence of fragmentation, the intermediate input M is produced within the country because the possibility of accessing the cheaper intermediate from abroad is impeded by fixed costs (F): [P.sup.*.sub.m] < [P.sub.m] where [P.sup.*.sub.m] is the price of the foreign intermediate good. Given [P.sub.z], a fall in [P.sub.m] will raise [w.sub.s]. Let [w.sup.*.sub.s] be the corresponding skilled wage when the price of the input is [P.sup.*.sub.m]. Also, [w.sup.*.sub.s] and [P.sup.*.sub.m] are negatively related. If ([w.sup.*.sub.s] - [w.sub.s])S < F, skilled entrepreneurs do not have any incentive to use the foreign intermediate good (Figure 1).

[FIGURE 1 OMITTED]

Without loss of generality, we choose good Y to be the numeraire: [P.sub.y] = 1. Throughout the text a "^" denotes proportional change.

Note that for [P.sup.*.sub.m] [member of] [[[bar.P].sup.*.sub.m], [P.sub.m]] lower-priced intermediate will not be used. It is assumed that the skilled labor sector as a whole decides on using the cheaper intermediate good and decides on incurring the fixed cost, and if [P.sup.*.sub.m] < [[bar.P].sup.*.sub.m], only then does import take place. It is straightforward to argue that a lower F and/or higher S will increase [[bar.P].sup.*.sub.m], the critical maximum price of the foreign intermediate for which the local users will go for foreign intermediate. Suppose a decline in F makes it possible for the producers to pay [P.sup.*.sub.m] and this is what we define as "fragmentation" in our framework.

Competitive equilibrium implies

(1) [wa.sub.lx] + [Ra.sub.tx] = [P.sub.x],

(2) [[bar.w]a.sub.ly] + [ra.sub.ly] = 1,

(3) [w.sub.s][a.sub.sz] + [P.sub.m][a.sub.mz] = [P.sub.z],

(4) [w.sub.s][a.sub.sm] + [ra.sub.km] = [P.sub.m].

Full employment of resources is ensured by

(5) [a.sub.sz]Z + [a.sub.sm]M = [bar.S],

(6) [a.sub.ky]Y + [a.sub.km]M = [bar.K],

(7) [a.sub.tx]X = [bar.Y].

The Harris-Todaro migration equilibrium yields

(8) [bar.w] [[a.sub.ly]Y/[bar.L] - [a.sub.lx]X] = w.

It may be noted that the full-employment condition with flexible wage would be:

(8') [a.sub.lz]X + [a.sub.ly]Y = [bar.L].

Equilibrium in the market for the local intermediate good requires

(9) [a.sub.mz]Z = M.

We have nine equations to solve for w, R, r, [w.sub.s], [P.sub.m], X, Y, Z, and M.

IV. FRAGMENTATION, EMPLOYMENT, AND WAGES

Initially [P.sub.m] is the local price of the nontraded good before the process of fragmentation sets in. Let us first look at the impact of a rise in [P.sub.z] in the global market at this stage. Figure 2 shows the relationship between [w.sub.s] and [P.sub.m] (ZZ represents Equation (3) and MM represents Equation (4)) given r (from Equation (2)) and [P.sub.z].

[FIGURE 2 OMITTED]

A rise in [P.sub.z] moves the equilibrium from [E.sub.0] to [E.sub.1] raising both [w.sub.s] and [P.sub.m]. First note, from Equation (4), that [w.sub.s]/[P.sub.m] must rise as r is held fixed. Therefore, the unit skilled labor requirement in the intermediate goods sector as well as the skilled exportable sector ([a.sub.sm] and [a.sub.sz], respectively) must fall and the unit intermediate goods' requirement in the skilled exportable sector ([a.sub.mz]) must rise. Since S is given, and [a.sub.sm] and [a.sub.sz] are falling, Z and/or M must rise. But [a.sub.mz] has gone up and so will M/Z. This must imply that the output of the nontraded intermediate good (M) rises.

Now the unit capital requirement in the intermediate goods sector ([a.sub.km]) has gone up, M has gone up, but the unit capital as well as unskilled labor requirement in the import-competing sector ([a.sub.ky] and [al.sub.y], respectively) remain unchanged. Therefore, the output of the importable (Y) must fall. This must imply a drop in urban employment, a reverse migration to the agricultural sector (X), and a drop in w. Hence, our first proposition follows. The anticipated movement in the skilled-unskilled wage differential is consistent with that in the flexible-wage (full-employment) equilibrium.

PROPOSITION 1. Without fragmentation, an increase in the price of the skilled exportable raises skilled wage and reduces the rural unskilled wage, thus unambiguously increasing the skilled-unskilled wage gap. This also raises unemployment.

[FIGURE 3 OMITTED]

Proof See discussion above. [QED].

A rise in [P.sub.m] and M draws capital away from the unskilled import-competing sector (Y) and penalizes the unskilled labor.

Consider now the effect that fragmentation has on the labor market. Fragmentation reduces [P.sub.m] to [P.sup.*.sub.m], which is now exogenously given to the small economy. In Figure 3, we now have the equilibrium combination ([w.sup.*.sub.s], [P.sup.*.sub.m]), which makes local production of M unprofitable.

All skilled labor will now produce Z by importing M at [P.sup.*.sub.m] and all capital will leave sector M for Y. This definitely implies that Y will increase, w will increase, and unemployment will fall. The probability of being employed by members of the unskilled urban workers is thus raised, drawing workers away from the agricultural sector, thus raising their marginal product. Hence, the following proposition. The anticipated movements in the absolute levels of skilled wage and unskilled wage are consistent with that in the flexible-wage (full-employment) equilibrium.

PROPOSITION 2. Fragmentation raises skilled wage as well as the rural unskilled wage and reduces unemployment.

Proof See discussion above. [QED].

Let us now turn to the effect of fragmentation on the skilled-unskilled wage gap. Hereinafter, [[theta].sub.fi] represents the unit cost shares of factor f in industry i. From Equation (3),

(10) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

From Equation (6),

(11) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

From Equations (7) and (8),

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

(12) -[bar.w][L.sub.y][??] = 0,

which boils down to

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

(13) -[bar.w][L.sub.y][[??].sub.M],

where [[sigma].sub.X] is the elasticity of substitution between land and labor in the agricultural sector.

From Equation (1),

(14) -[bar.w][L.sub.y][??]

Substituting Equation (14) in Equation (13),

(15) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Note that the magnitude of the change in w depends on how much capital is being released from M to Y as well as on the extent of unemployment and the elasticity of substitution. From this follows our next proposition. In contrast, the flexible-wage (full-employment) equilibrium would anticipate that fragmentation raises the skilled wage relative to the rural unskilled wage when the skilled export good is less capital intensive relative to the importable good.

PROPOSITION 3. For very high degrees of substitution between land and labor, fragmentation raises the skilled wage relative to the rural unskilled wage but can lower the skilled wage relative to the rural unskilled wage for very low degrees of substitution.

Proof From Equations (10) and (15), [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Note that, as [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]. [QED]

However, fragmentation definitely has the tendency to raise the rural wage and increase urban employment by creating a more specialized skilled labor.

Intuitively, for a given price of the skilled export good, the decline in the price of the intermediate means that the price of skilled labor must rise. The fact that all intermediates are now imported means that capital is freed up to go to the manufacturing sector. This necessarily raises output in that sector (note that because of the fixed unskilled manufacturing wage, the rental rate is also fixed; this means input-output coefficients in manufacturing are fixed as well) and consequently unskilled employment rises as well. The increased demand for unskilled labor drives up the unskilled agriculture wage. If the unskilled agricultural wage were to remain constant, then urban unemployment would have to rise, which could only happen if labor used in agriculture fell. But this could only happen if agricultural output fell. But with unchanged product and factor prices, production techniques are not changing, and the full use-of-land condition would mean that agricultural output could not fall; consequently, the unskilled agriculture wage must change, that is, it rises. So, fragmentation leads to an increase in both wages. Fragmentation also leads to reduced unemployment (because it reduces the gap between the fixed, unskilled urban wage and the unskilled agriculture wage). Because both wages rise, the skill premium is ambiguous; under some conditions it is possible for the skill wage to increase by more than the unskilled wage.

Consider now the effect that a rise in [P.sub.z] in the global market has on [w.sup.*.sub.s] at any given [P.sup.*.sub.m]. In Figure 4, we have the equilibrium combination ([w.sup.1*.sub.s], [P.sup.*.sub.s]), which renders local production of M unprofitable before and after the improvement in the terms of trade. All skilled labor will continue to produce Z by importing M at [P.sup.*.sub.m] and all capital will be absorbed in Y. The output of the skilled exporting sector will increase but the output of the unskilled import-competing sector will remain unchanged since it is already absorbing all capital. As a result, unskilled rural wage will remain the same and the skilled-unskilled wage gap will unambiguously increase. Unemployment remains unchanged.

[FIGURE 4 OMITTED]

The following two propositions follow immediately.

In contrast, the flexible-wage (full-employment) equilibrium would anticipate an increase in both the skilled and unskilled wages following an improvement in the terms of trade when fragmentation is allowed and any change in the skilled-unskilled wage differential would be directly related to the relative capital intensity of the import-competing and nontraded goods.

PROPOSITION 4. When fragmentation is allowed, an improvement in the terms of trade raises the skilled-unskilled wage gap by raising skilled wage without any effect on the rural unskilled wage and urban unemployment.

Proof See discussion above. [QED].

PROPOSITION 5. Fragmentation magnifies the increase in the skilled-unskilled wage gap resulting from an improvement in the terms of trade for high degrees of substitution between land and labor.

Proof From Equation (15), as [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]. Hence, [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

denotes the direct [[theta].sub.sz] plus indirect [[theta].sub.sm][[theta].sub.mz] cost share for skilled labor in sector Z. [QED].

Finally, let us look at the effect that a technical progress in M, as an alternative to outsourcing, has on the labor market. Consider, for simplicity, a uniform exogenous decline in the unit requirement of skilled labor and capital for the production of M.

[FIGURE 5 OMITTED]

In Figure 5, the equilibrium moves from [E.sub.0] to [E.sub.1] raising [w.sub.s] and lowering [P.sub.m]. Hence, [w.sub.s]/[P.sub.m] must rise. As a result, the unit skilled labor requirement in the skilled exportable sector ([a.sub.sz]) must fall and the unit intermediate goods' requirement in the skilled exportable sector ([a.sub.mz]) must rise. Since S is given, and [a.sub.sm] and [a.sub.sz] are falling, Z and/or M must rise. But [a.sub.mz] has gone up and so will M/Z. This must imply that the output of the nontraded intermediate good (M) rises and the output of the importable (Y) must fall. This must imply a drop in urban employment, a reverse migration to the agricultural sector (X), and a drop in w. In effect, M goes up and Y goes down reducing w and increasing unemployment. Our final proposition follows.

PROPOSITION 6. Without fragmentation, a technological progress in the intermediate goods sector raises skilled wage and reduces the rural unskilled wage, thus unambiguously increasing the skilled-unskilled wage gap, and raises urban unemployment.

In contrast, fragmentation would remove the intermediate goods sector (M) altogether and capital would be employed in the production of the importable final good (Y). This also shows that if one sector vanishes totally, it does not necessarily make the poor worse off after all.

V. CONCLUDING REMARKS

This paper offers a simple general equilibrium framework for understanding the effect of trade liberalization and fragmentation on employment and the skilled-unskilled wage differential in the third world where rural-urban migration is a pervasive phenomenon in the presence of urban unemployment. In all cases, the absolute wage of the skilled labor does improve. It is shown that fragmentation unambiguously reduces urban unemployment and can cause an increase in the wage of skilled labor relative to unskilled labor if there is a high degree of substitutability between land and labor. The effect of fragmentation, ceteris paribus, on the skilled-unskilled wage gap depends on the elasticity of (factor) substitution. As such, fragmentation can magnify the increase in the skilled-unskilled wage gap resulting from an improvement in the terms of trade. When fragmentation is allowed, a rise in the price of the skilled exports increases the skilled-unskilled wage differential without affecting urban unemployment. Without fragmentation, a technological progress in the intermediate goods sector raises the skilled-unskilled wage gap and raises urban unemployment. If instead of outsourcing a better technology is employed to produce the intermediate good, it affects the poor. Since capital stock is fixed, it can get reallocated to the import-competing final goods sector. If growth is weak in the developing economies, capital is not growing very fast, sustained increase in the output of the intermediate goods sector will hurt the import-competing final goods sector and employment. However, if the import-competing final goods sector is initially protected, then a decline in its output may be welfare improving.

It is our hope that future researchers will consider possible extensions of our model as it centers around an issue that has been relatively underresearched despite its importance, especially in the less-developed countries. Some natural extensions of our model may include imposing the structure of an overlapping generations model, introducing diversification in household ownership of factors, incorporating domestic distortions, and endogenizing product prices. It would also be interesting to see the effect that fragmentation has on the skilled labor formation in an extension of our model where endogenous skill formation is tied to urban fixed or semifixed wage distortion. Finally, allowing wages (as in efficiency wage or search models) to be endogenously fixed (or semifixed) is also an extension worth exploring.

doi: 10.1111/j.1465-7295.2009.00247.x

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(1.) Using more than two decades of industry data, Campa and Goldberg (1997) profiled the external orientation of manufacturing industries in the United States, Canada, the United Kingdom, and Japan. Yeats (2001) provided estimates of the importance of global production sharing in international trade. Hummels, Ishii, and Yi (2001) documented the use of imported inputs in producing goods that are exported from ten OECD economies and four emerging economies.

(2.) See Beladi, Chaudhuri, and Yabuuchi (2008).

(3.) See Marjit and Acharyya (2003) and Chaudhuri and Yabuuchi (2007).

(4.) Since India, China, and the Latin American countries import intermediate goods to be used along with skilled labor to produce the exportable good, a rising wage inequality in these countries can be linked to a change in their export pattern. For a discussion on the theoretical aspect of such an interpretation, one may look at Jones, Beladi, and Marjit (1999).

(5.) The reader may note that the model presented in the current paper is distinct from that in Marjit, Beladi, and Chakrabarti (2003) since the production structure in the current paper contains a meaningful link between factor price determination and output determination by allowing unemployment (a la Harris-Todaro) and, in consequence, removes the otherwise analytically convenient dichotomy.

(6.) We consider the rural wage rate as the unskilled wage. It may be noted that unskilled labor obtains a higher fixed-wage rate in the urban area. As such, the expected wage rate for an unskilled worker is [[lambda].sub.lx] w + [[lambda].sub.ly][bar.w] = [[lambda].sub.lx] w + (1 - [[lambda].sub.lx]) w = w, where [[lambda].sub.ij] stands for the fraction of the endowment of labor employed in sector j.

HAMID BELADI, AVIK CHAKRABARTI and SUGATA MARJIT *

* We wish to thank anonymous referee(s) for insightful comments and suggestions on an earlier version of this paper. The usual disclaimer applies.

Beladi: Professor, Department of Economics, College of Business, University of Texas at San Antonio, One UTSA Circle, San Antonio, TX 78249-0633. Phone 210-458-7038, Fax 210-458-7040, E-mail hamid.beladi @utsa.edu

Chakrabarti: Associate Professor, Department of Economics, College of Letters and Science, University of Wisconsin-Milwaukee, 816 Bolton Hall, PO Box 413, Milwaukee, WI 53201. Phone 414-229-4680, Fax 414229-3860, E-mail chakra@uwm.edu

Marjit: Professor, Department of Economics, Centre for Studies in Social Sciences, R-1 Baishnabghata Patuli Township, Calcutta 700-094, West Bengal, India. Phone 852-2788-7745, Fax 852-2788-8806, E-mail smarjit@hotmail.com

TABLE 1
Trade Liberalization, Wage Inequality, Urban Unemployment, and
Rural-Urban Migration in Five Latin American Economies

 Changes in
 Trade Skilled-Unskilled
Country Regime (a) Wage Gap (a)

 1967-1982 Barrier reduction with Widened
 appreciation
 1989-1993 Barrier reduction with Narrowed
 appreciation
Chile (Santiago)
 1974-1979 Barrier reduction with Widened
 devaluation
 1984-1992 Devaluation Fluctuated
Colombia (seven cities)
 1985-1994 Devaluation till Widened
 1989, barrier
 reduction in
 1990-1992
Costa Rica
 1985-1993 Barrier reduction Widened
 and devaluation except in
 1988-1990
Uruguay (Montevideo)
 1990-1995 Barrier reduction Widened

 Urban
 Unemployment
Country Rate (b)

 1967-1982 2.6% (1980)
 1989-1993 17.4% (2001)
Chile (Santiago)
 1974-1979 10.4%
 1984-1992 9.1%
Colombia (seven cities)
 1985-1994 10%
 (before liberalization)
 8.6%-19.4%
 (after liberalization)
Costa Rica
 1985-1993 6%
 (before liberalization)
 4%-6.6%
 (after liberalization)
Uruguay (Montevideo)
 1990-1995 7.4%
 (before liberalization)
 8.3%-15.3%
 (after liberalization)

 Rural-Urban (Net)
 Migration (as a
 Proportion of
Country Urban Growth) (c)

 1967-1982 51%
 (before liberalization)
 1989-1993 27.6%-31.1%
 (after liberalization)
Chile (Santiago)
 1974-1979 33.6%
 1984-1992 11.8
Colombia (seven cities)
 1985-1994 36.6%-50.5%
 (before liberalization)
 30.8%
 (after liberalization)
Costa Rica
 1985-1993 23.3%-35.1%
 (before liberalization)
 42.9% (after liberalization)
Uruguay (Montevideo)
 1990-1995 24.2%
 (before liberalization)
 25.9%-27.8%
 (after liberalization)

(a) Source: Wood (1997).

(b) Source: Economic Commission for Latin America and the
Caribbean (2000).

(c) Source: Cerrutti and Bertoncello (2003).

TABLE 2
Skill-Intensive Exports from Top Ten Latin American Exporting
Countries (by Product Group)

Product Group 1996 1997 1998 1999 2000

Computer equipment 2,926 4,026 4,679 6,741 8,511

Medical equipment 94 178 234 243 253

Optical instruments 8 13 13 21 34

Medical instruments 679 893 1,004 1,151 1,552

Photographic equipment 128 171 248 298 403

Optical fibers 98 123 155 161 204

Telecommunication equipment 3,540 4,725 5,776 7,566 12,643

Electric power transmission
equipment 1,453 1,757 2,091 2,388 2,876

Electric circuit equipment 2,718 3,072 3,415 3,869 5,504

Electrical distribution
equipment 4,690 5,240 5,523 6,289 7,189

Note: Values are given in US$ million.

Source: United Nations Commodity Trade Database.