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T
o have the world at your doorstep is quite exciting. The most visible part of such a contact is the over- whelming proliferation of cable channels in our TV sets. Our access to world news, information regarding the consumption standards worldwide, our exposure to technological changes, encounter with the websites, etc, get increasingly interwoven with our lifestyle. Virtual distance between us and any point in the globe has been drastically reduced with far-reaching im- plications for international trade, invest- ment, income, employment and growth. These in turn have effects on more desir- able yardstick of development, poverty and inequality. We think that the term globalisation, as is popularly used, defines a process of integration with the rest of the world. Such integration is routed through increasing volume of foreign trade and investment. The major task of an economist is to work out the welfare implications of such a transformation both from aggregate and distributive perspec- tives. In regard to the distributive effect, in particular, economists in the industrialised world are worried over a noticeable empirical phenomenon that suggests a considerable decline in the income of unskilled labour and/or a de- cline in their employment relative to the more skilled segment of the workforce. This has happened in the US and in Europe over the last 20 years and has roughly coincided with the buoyant phase of inter- national trade and investment. Substantial
research work has been devoted to this aspect [Bhagwati 1995; Davis 1998; Feenstra and Hanson 1995; Jones and Engerman 1996; Leamer 1995; Wood 1997]. Inequality is a complex phenomenon and trade and labour economists have reduced it to the minimum dimension of abstraction by focusing on the ratio of unskilled to skilled wage rate and/or employment. Also the issue of poverty and inequality is far more important for the developing countries both because of the alarming and overwhelming proportion of the population living below the poverty line (however measured) in these nations and also because inequality by halting growth usually leads to the self-perpetu- ation of a low-level equilibrium [Banerji and Newman 1993; Gal-Or and Zeira 1993]. The agony of being stuck at a low level equilibrium is what distinguishes the south from the north. Having only an old car in a world where everyone else owns a top-of-the-line Mercedes may be psycho- logically as painful as starving to death while everyone else enjoys a lavish dinner. However, in the latter example someone dies whereas in the former the choice to survive physically is always there. It is also possible that a marginal increase in real income from the subsistence level does a lot of good even when a richer person increases her income far more substan- tially. An alternative scenario, with lower income for the rich and no change in income for the poor, may improve the Gini coef- ficient but does not do anything for the
poor. There are plenty of such examples that prove that the issue of inequality is far more complex than the standardisation of the problem in terms of the relative wage of the unskilled. However, it is also im- portant to recognise that the absolute real income of the unskilled should be a crucial category along with their relative position in the economy. Substantial improvement in the real income of poor workers can definitely compensate for the rise in in- equality. One purpose of this paper is to deal with these two categories in terms of analytical structures that substantially alter the standard trade theoretic results. As it always happens, inequality had to grow in the developed world to make trade and inequality a hot topic of research. Historically the argument favouring free trade has always been packaged with the idea of compensation and redistribution to make everyone better off through trade. Theoretically, exposure to international trade benefits factors used intensively in the export sector. If these factors are at the lower end of inequality, degree of inequal- ity must get reduced through trade. This is the cornerstone of the neoclassical trade theory, technically known as the Stolper- Samuelson (SS) result. If the US or Europe have abundance of physical capital and/ or skilled workers and their trade pattern with the rest of the world follows Heckscher-Ohlin, we can expect concen- tration of unskilled workers in their im- port-competing sectors and consequently freer trade must make these workers worse
Globalisation and Inequality
An Analytical Perspective
With the possible exception of the east Asian countries, increased foreign trade and investment
have increased wage inequality in almost all parts of the globe during the last two decades of
the 20th century. Theoretically as well as empirically Heckscher-Ohlin-Samuelson model of
trade, with the Stolper-Samuelson result at its core, fails to explain such widening of wage
gap between skilled and unskilled labour particularly in the south. This paper discusses
alternative variants of the specific factor model accounting for the diverse trade pattern,
informal factor markets and existence of non-traded goods, that can help our
understanding of the wage gap phenomenon.
RAJAT ACHARYYA, S UGATA MARJIT
S pecial articles
off both in absolute and relative terms. This is precisely the argument of the trade theorists linking Mexico-US trade and the formation of NAFTA with the observed widening wage gap. If the poor gets poorer through trade, inequality is likely to grow. In fact, one complaint has been that the blue collared workers in the rich countries have been increasingly exposed to fierce competition from the Asian and Latin American exports and therefore it is natural that poverty and inequality will grow as an inevitable fallout of the process of globalisation. The competing view of wage inequality, however, tends to contain the backlash on freer trade and argues that technological change that depends increasingly on skilled workforce must reduce the relative de- mand for the unskilled. Hence, technology and not trade is the real culprit. These issues are summarised in Wood (1995).
Developing Country Scenario
Generally speaking not much attention has been devoted to the analysis of globalisation and inequality in the devel- oping countries. Of course, we do not undermine the recent works of Robbins (1994, 1995, 1996a, 1996b) and Wood (1997) and their empirical findings that point towards growing wage inequality in the southern hemisphere. What bothers us is the thin list of theoretical possibilities that are grounded in an antiquated dem- onstration of the Stolper-Samuelson re- sult. Moreover, an apathy towards having a closer look at the labour markets of the developing countries and a casual treatment of the trade theory, ignoring the possibili- ties that lie underneath the surface, means committing the theory to conclusions which are only artefacts of weak theorisation. This is what this paper tries to avoid and for this purpose we suggest models that can be used in the applied work instead of the straitjacket application of the Stolper- Samuelson (SS) result. Empirical methodology which illumi- nates our view regarding trade and wage inequality is extremely difficult to imple- ment in an aggregative study because one has to control for many variables that determine the degree of inequality. Con- trolling for other explanatory factors also means that one is more or less certain about the mechanism , which determines the nature of such partial dependence of in- equality on trade and investment. Explor- ing such a mechanism rigorously is what
we set out to do. It has to do with what is the most likely outcome of liberalising trade if one is concerned with the real income of the poor workers, particularly in an economy which exhibits large agri- cultural sector, pockets of economic sophi- stication, possibly dualism, large informal labour markets, non-traded activities, capi- tal constraint, etc. Such proliferation of concerns sounds far too complex for an experiment with the SS type result in a general equilibrium framework. But as we argue, between the vintage two-sector Heckscher-Ohlin structure and a multi- sector analytically unsolvable general equilibrium model lies the possibility of constructing something meaningful, of course more transparent to people who appreciate theory, but not less interesting to a wide range of economists. In some of our recent work we have tried to make serious efforts in this respect and we will present a bird’s-eye view of these models [Acharyya and Marjit 1999; Marjit 1997; Marjit et al 1997, Marjit and Acharyya 2000]. Before going to the next section, it should be mentioned that the regional dimension of trade and inequality has been a major research topic for economists working on various aspects of the European Union. A different type of research is needed to assess the impact of globalisation on inter- regional disparity in a big country like India. Should we expect that trading ac- cording to comparative advantage would lead to the convergence of economic well- being of the Indian states? Such a dimen- sion of inequality is noticeably absent in countries such as Singapore, Hong Kong and Taiwan. In India regional disparity, imbalances and promotion of backward states and regions have been highlighted in the context of the devolution of fiscal power between the centre and the states. A small but growing literature has been dealing with these issues for a while mainly handling the divergence of per capita net state domestic product (PCNSDP) in the post-independence period [Ghosh et al 1998; Nagaraj et al 1997]. Little analysis is available on how different regions have performed in the post-reform period. One intriguing statistical evidence is that the coefficient of variation in PCNSDP does have positive correlation with the open- ness index for the entire post-indepen- dence period. Such a correlation increased substantially during the post-reform pe- riod. Except some recent works by Krugman (1997) and Deardorff and Courant (1992),
trade and regional concentration or diver- sifications have not received much atten- tion from trade theorists. However, no such attempt will be made in this paper though this is certainly on our future re- search agenda. This paper has four sections. Section I summarises the country experiences with trade, wage distribution, poverty and inequality. This part of the analysis is basically informative and is not at all exhaustive partly because no such analysis is available and partly because the focus of this paper is theoretical. Section II is devoted to an overview of the neoclassical trade theoretic results at the frontier of research, which may help our understand- ing of the issue of trade and wage gap. In Section III we elaborate a theoretical re- search agenda that explicitly focus on the pattern of trade, labour markets and im- perfections in a typical developing economy.
I
Wage Inequality: Empirical
Evidences
Despite asymmetries in the extent of changes in relative wages of skilled and unskilled workers, the experiences of the high and low/middle income countries are more or less similar. Except for the east Asian countries, the general trend that has been observed is an increase in the ratio of skilled to unskilled wages, i e, a wid- ening wage gap between skilled and un- skilled workers, in most part of the globe since 1970s. In Europe, where national institutions have a particularly strong in- fluence on wage settings, the deterioration of the relative position of the relatively unskilled workers is reflected in rising unemployment. Over the 1970s although the US economy became considerably open, the premium earned by educated workers actually de- clined. The situation has changed drasti- cally from the 1980s onwards as the real wages have stagnated and relative wages have become more dispersed. These have been accompanied by dramatic increase in inequality of earnings based on education, experience and occupation. For example, as observed by Bound and Johnson (1992), the ratio of the average wage of a college graduate to the average wage of a high school graduate rose by 15 per cent. Reich (1991) put it more strongly: global com- petition has bifurcated American workers into two groups, the high-earning ‘sym-
The case of Philippines is less transparent during its modest liberalisation episode (1978-88). Skill differentials in wages widened during severe recession in 1982- 86, but then narrowed again [Robbins 1994]. The evidence in south Asia is not very systematic. Though any comprehensive empirical study is yet to come by, some casual empiricism points out widening wage gap in south Asia including India. The impact of the so-called globalisation in this region is studied from a broader perspective of employment, growth and poverty by Dev (2000), Khan (1998) and Tendulkar et al (1996). The employment scenario, according to Dev (2000), is encouraging enough at the aggregate level though not so much at a more disaggregate level in the post-liberalisation era. On the other hand, Khan (1998) finds that the process of expansion in foreign trade and investment in south Asian countries is consistent with rising incidence of poverty in these nations. Typically, if poverty is really on the rise then it must worsen the inequality situation. Although no systematic study on wage dispersion caused by trade liberalisation in India is available, there is one interest- ing piece of evidence that points to grow- ing wage inequality in the post-reform period. In Table 2 we look at the range of wages for the lowest daily paid unskilled workers in the organised sectors for the periods 1985-86 and 1993-94. Since the process of economic reforms started in 1991-92, we use these two periods as pre- reform and post-reform data points respec- tively. Note that for all states there is substantial difference between the maxi- mum and minimum value for both periods. If we assume perfect labour mobility within the states, this looks a bit awkward. The only meaningful explanation is that the data is available at some level of aggre- gation and part of the differential possibly captures productivity or skill gap even among the unskilled. Of course, there may be cost of living differences as well. Whatever be the case, what is striking is the difference in the extent of the gap between the maximum and minimum wage over the two periods. This difference or range as a proportion of minimum wage has increased by more than seven times for Maharashtra, 15 times for Tamil Nadu and uniformly for other states except Punjab. The average was about 0.48 in 1985- and more than 2 in 1993-94. Such wid- ening of the gap does not necessarily reflect
the impact of a more open trade environ- ment since there may be several factors affecting demand and supply of labour. But it is a convenient starting point.
II
Standard Trade Theory
The wage determination process in a trading economy is important in under- standing the relationship between trade liberalisation and the wage gap. As neatly summarised in Jones and Engerman (1996), in any general equilibrium (GE) model factor prices are influenced by commodity prices, factor endowments and technol- ogy. If Pi, Ei and Ti denote effects of changes in commodity prices, in endow- ment or factor supply base and in technol- ogy respectively, then the relative change in price of factor i is given as,
w^i = P (^) i + Ei + Ti ...(1) where w (^) i denotes proportional change in money wage. The important point to understand in this context is that any other factors, such as trade deficit or surplus, volumes of trade and the like, cannot affect factor prices independent of Pi, E (^) i and Ti. 1 The effects of these three terms in equa- tion 1 on wages, however, depend on the number of goods versus the number of factors. An economy consuming m goods and having n factors of production, will produce only n goods, when m > n, at a given set of world commodity prices. The (m – n) remaining goods will be imported entirely. The even case, number of goods equal to number of factors, describe the HOS scenario whereas m < n describes the specific factor model a la Jones (1971). In both the even and the m > n cases, the unique result is that Ei = 0. That is, at given commodity prices, factor prices are uniquely determined and any change in
factor supply or endowment base of the country can be accommodated through changes only in the composition of out- puts. Thus no changes in factor prices and consequently in factor intensities are needed to clear the domestic factor markets. This often misunderstood one-to-one correspon- dence between commodity prices and factor prices, given the state of the technology, holds the centre-stage of the HOS model and the wage gap debate.^2 In particular, when Pi is the weighted average of all commodity price changes, in absence of any no money illusion, equation 1 boils down to
w^^ i = Σj βj ^p (^) j ...(2) Therefore, for a trading economy, the wages are uniquely determined from outside, no matter how small or large the volume of trade is, given the technology. Recently, Leamer (1995) has put it in a different way: even though trade dependence, volume of trade as a proportion of GDP, is low in the US, the existence of the apparel indus- try means that wage of the unskilled worker in the US is determined in Shanghai. Another important characteristic of the wage-price relationship in equation 2 is the magnification effect as we will demon- strate later in the context of a 2x2 HOS model with no joint production. This is the essence of the much celebrated Stolper- Samuelson (SS) theorem and is reflected in the fact that at least one βj is greater than unity and another is negative [Jones and Engerman 1996:36]. Thus the factor price changes are more than proportionate to commodity price changes. Does the unique relationship in equa- tion 2 mean that any increase in the ratio of skilled and unskilled workers in the economy over time, for example, through education and training, has no impact on the wage gap? The answer depends on the importance of the economy in the world
Table 2: Range of Minimum Wages for Lowest Daily Paid Unskilled Workers in Organised Sectors (in Rupees) 1985-86 1993- Central/ Minimum Maximum Range/ Minimum Maximum Range/ State Government Min Wage Min Wage Central 8.50 12.75 0.50 19.82 37.37 0. Andhra Pradesh 7.00 18.00 1.57 11.00 40.00 2. Bihar 8.50 8.50 0.00 16.00 26.24 0. Kerala 12.00 15.00 0.25 19.50 75.40 2. Maharashtra 6.00 10.00 0.66 11.00 64.00 4. Punjab 14.00 16.44 0.17 41.50 41.50 0. Tamil Nadu 8.00 11.00 0.38 8.00 49.20 5. Uttar Pradesh 8.00 9.50 0.18 18.00 42.00 1. West Bengal 7.29 10.15 0.39 7.76 45.00 4. Source:Annual Report 1993-94, Ministry of Labour, Government of India.
market. With full sectoral factor mobility, such changes in factor endowment must affect the world commodity prices first in order to influence the wages. If the country is small enough to affect the commodity prices, there would certainly be no changes in wages. Otherwise, with the output composition changing, the world relative price of skill-intensive commodity will fall through consequent excess supply. Ac- cordingly, given equation 2, the relative wages change. But changes in factor supplies will have a direct influence on factor returns when the number of factors is greater than the number of goods (m < n). Thus, in a specific factor model, Ei ≠ 0. Having such understanding of wage determination process in the standard trade theoretic general equilibrium models, let us now turn to the explanation of the wage gap phenomenon. The cornerstone of the trade theorists’ argument on the link be- tween trade liberalisation and widening wage gap is the HOS model and the Stolper- Samuelson theorem. But the problem with such an argument is that simultaneous widening of wage gap in the trading na- tions cannot be justified theoretically though observed empirically. To fix idea, suppose in a two country, two commodity framework the home country exports good X, i e, it has a comparative advantage in good X, indicated by the lower relative price of good X:
p (^) a < p (^) a* ...(3)
Whatever may be the source of such comparative advantage or price differences, through arbitrage (buying cheap and sell- ing dear) and consequent physical move- ments of goods across national borders, the domestic prices will eventually be equalised thereby stopping any further movements of goods. Thus, the relative price of good X rises in the home country and falls in the foreign country. How are the factor prices expected to change consequent upon such commodity price movements? Suppose the home exportables are relatively unskilled labour- intensive. As the relative price of ex- portables increases, the production of the import-competing good Y contracts and that of the exportable good X increases. The consequent resource reallocation leads to an excess demand for unskilled labour and an excess supply of skilled labour because the expanding X sector requires more unskilled labour and can absorb fewer skilled labourers than are released by the
contracting Y sector. Hence, the unskilled money wage increases whereas the skilled money wage declines. However, we can expect something more than just these changes in the absolute prices. An appeal to the SS theorem in- dicates that freer trade causes the real wage to increase and the real return to capital fall [Caves et al 1996]:
w > P^^ ^^ ^^ ^ X > 0 > PY > wS ...(4) This is essentially a restatement of the price magnification effect implied by equation 2. It is to be noted that unskilled workers gain through trade. Conversely, in the foreign country a similar argument leads to,
w^^ ^^ ^^ ^ S* > P^ Y * > 0 > P^ X* > w*^ ...(5) That is, free trade makes foreign skilled workers better off and unskilled workers worse off. What the above price magnification effects or the (generalised) SS theorem indicate is that trade liberalisation causes the wage gap to change asymmetrically in the two countries. Therefore, the HOS model with the SS theorem at its core does not take us very far in explaining the more or less similar income distributional ef- fects of free trade observed in the north and in the south. There is one exception, however, of the above asymmetric effect when production technology exhibits factor intensity rever- sal (FIR). But this is an exception rather than a rule. Another plausible case is where countries produce similar as well as dif- ferent goods such that the relatively skill- intensive good in one country is not so skill-intensive in the other. In a three commodity setting, for example, if coun- tries completely specialise in the most and least skill-intensive commodities with the moderately skill-intensive commodity produced in common, symmetric changes in wage gap can be obtained. 3
III
Alternative Theoretical
Framework
From the empirical evidence cited in Section I it is immediate that for the trade theorists the task at hand is twofold. The first is to generate more or less symmetric changes in the wage gap in the trading nations. The second is to explain widening wage gap through increased trade in the south or the developing countries having an abundance of unskilled workers. On
both the counts we have seen that the standard HOS model or its variants fail to corroborate the empirical findings. One important property of the HOS model as explained above is the independence of wages from endowments of skilled and unskilled workers. Any changes in such factor supplies can affect wages only through changes in world commodity prices and that too when the country is an im- portant trader in the world market. In terms of our discussion in Section II above this means for a small open economy (or as a matter fact, for given world prices), Ei = 0. But the findings of Robbins (1996a) of strong domestic supply impact on relative wages in Colombia suggest forces incon- sistent with this property of the HOS model. As pointed out earlier, in the specific factor model of trade where the number of factors of production is greater than the number of traded goods, the endowment base of the economy has direct influence on wages. It may appear obvious then to presuppose better applicability of such a model on the basis of the findings of Robbins (1996a). But the specific factor model too, unless modified, cannot explain the symmetric changes, in the wage gap in the trading nations. The main problem with these standard theories is their failure to capture the diverse trade pattern that the developing nations are showing up in their export baskets of late, and the institutional characteristics specific to them. Our on- going theoretical research indicates that inclusion of trade in intermediate goods in a variant of the specific factor model may generate symmetric changes in factor prices. On the other hand, pecularities such as exporting both skill-intensive manufac- turing and unskilled labour intensive ag- ricultural products, coexistence of organised and informal labour markets and the production of goods that are not (or cannot be) traded, are capable of explain- ing the relationship between openness and wage-gap in the south. In the rest of the paper we sketch a theoretical structure incorporating these features to highlight the trade and widening wage gap nexus.
Trade Pattern Of late, the trade pattern of the devel- oping countries as reflected in their export baskets has become more diversified than it was a decade ago. Such diverse trade patterns cannot effectively be captured through an aggregative index of skill-in- tensity of exports. India’s export pattern is one such example revealing the draw-
duced expansion of activities in the traded sectors will be possible only through a fall in the demand for non-tradeables. This necessitates an increase in the price of non- traded goods and consequent changes in domestic income distribution. Herein comes the role of the nature of the non- trade sector. If it is a formal sector with a contractual wage, the non-traded price may be determined solely by the cost of production independent of the demand for non-traded good. In such a case demand variation consequent upon trade liberalisation induced real income changes alters only non-traded production. Accord- ingly any change in the wage gap is trig- gered by the consequent resource reallo- cation across the non-traded and traded sectors. But if the non-traded sector is an informal sector, variations in the demand for non-traded good is followed by changes in both production and price of the non-traded good. Accordingly, trade liberalisation will have quite different implications on the wage gap between skilled and unskilled workers. To fix ideas, we extend the earlier equa- tion system by incorporating a non-traded sector. First consider the case where rural labour market is informal whereas the urban labour market is organised. It is important to note that unskilled workers who cannot find any job in the urban organised sector(s) at high institutionally given money wage move to the rural sectors to work at even lower market-determined money wage. In this regard we deviate from the standard Harris-Todaro type assumption and instead follow the available empirical evidences cited in Agenor (1996), Agenor and Montiel (1996) and Mazumdar (1993) that low- skilled workers cannot afford to remain unemployed. Therefore, in a way unskilled labour is fully employed in our extended model as well although there are two distinct wage rates. Now from our assumption regarding the nature of rural and urban labour markets, it follows that the manufacturing Y sector hires unskilled labour at a given money wage, W, whereas the agricultural workers offer their work at the market-determined lower money wage, W. To begin with, suppose the non-traded good (N) is pro- duced in the urban formal sector. If only labour is used to produce this good, which is of course just a simplifying assumption, the non-traded price is cost-determined: P (^) N = aLNW ...(14) Output is, on the other hand, demand- determined given the simplifying assump-
tion that α proportion of total urban in- come is spent on the non-traded good and that the rural population does not have access to this output: PNN = a[(a (^) LYY + aLNN)W
- W (^) SS + rK] ...(15) These two equations are added to the basic structure described earlier and the full employment condition for unskilled labour, eq 11, now contains an additional term, aLNN. The important point to note is that the formal sectors form an independent sub- system of the economy. The output and prices of the factors used in production of Z, Y and N are all determined independent of the informal agricultural sector. 4 But the wage rate, the return to land and the agricultural output level crucially depend on the equilibrium values in the formal sectors of the economy. This is exactly what we can expect. Since only those unskilled workers who are not employed in the formal import competing and non- traded sectors at the higher contracted wage moves to informal agriculture, it is obvi- ous that its production activities will be constrained by the outputs and hence by the demand for unskilled labour in the formal sectors. Herein comes the role of the non-traded good. Had all goods been traded, production of agricultural exports would not necessarily be constrained by the demand for non-traded good and the consequent demand for unskilled labour. Any excess demand would have been met through imports. In such a set-up let us examine how an increase in the price of manufacturing exports affects the wage gap. The imme- diate impact will be an increase in the skilled wage and with the rate of return to capital held fixed by the given world price of importable and the ad valorem tariff rate, such increase will be more than proportionate. Consequently input substi- tution effect will raise production of manu- facturing exports. This causes output of the import competing good to fall since some capital is withdrawn to support the additional production of the Z good. But the change in urban income, at the initial non-traded output, is ambiguous as evident from equation 15: whereas the income of the capitalists remain unchanged, that of the skilled workers increase and the wage income of the workers in the Y sector decrease. Consequently, the demand for non-traded good and hence its output level may go either way.
If non-traded production falls, some unskilled labour will be released from this sector as well along with that from the import competing sector and accordingly the unskilled wage must fall to absorb them in informal agriculture. But if non- traded production increases, not signifi- cantly though, some of the released un- skilled labour will be absorbed in the non- traded sector thereby necessitating much smaller wage fall in the informal agricul- tural sector. In either case, the wage gap widens. It is only when non-traded pro- duction increases significantly, requiring more unskilled labour than is released by the contracting import competing sector, the unskilled wage will go up and the wage gap may decline consequent upon such (net) excess demand for unskilled labour in the formal sector as a whole. Import liberalisation through tariff re- duction, however, can be shown to widen the wage gap unambiguously. On the other hand, when the non-traded good is produced in the informal sector, PN is no longer independent of domestic de- mand. In such a case, as shown in Acharyya and Marjit (1999), the wage gap is more pronounced under import liberalisation compared to the above case of formal sector production of non-traded good. That is, the informal non-traded sector by itself appears to be source of the deteriorating position of the unskilled workers. With the possible exception of the east Asian countries, increased foreign trade and investment have increased wage in- equality in almost all parts of the globe during the last two decades of the 20th century. Theoretically as well as empiri- cally HOS model of trade with the Stolper- Samuelson result at its core fails to explain such widening of wage gap between skilled and unskilled labour particularly in the south. The main problem with these stan- dard theories is their failure to capture the diverse trade pattern that the developing nations are showing in their export baskets of late, and the institutional characteristics specific to them. Instead of straightjacket application of the HOS model and too much emphasis on the Stolper-Samuelson theorem, one needs to focus on these aspects. In this paper we have discussed alternative variants of the specific factor model accounting for the diverse trade pattern, informal factor markets and ex- istence of non-traded goods, that can explain to a large extent the wage gap phenomenon. EPW
Notes
[This paper has grown out of our ongoing work on Trade and Inequality. We would like to thank Amiya K Bagchi, Satya P Das, Ananya Ghosh Dastidar, Ronald Jones, Utsa Patnaik, Dipak Nayyar, and seminar and conference participants at the CSSS, Calcutta, Copenhagen Business School, IGIDR, Mumbai, JNU, Delhi and the University of Mumbai for stimulating discussions.]
1 Another factor that has no direct influence, of course, in absence of any non-traded good, is the devaluation or revaluation of the nominal exchange rates. Exchange rate changes proportionately raises all commodity prices and money wages leaving relative wages unchanged. Thus, as correctly pointed out by Robbins (1995a), the work on trade and wages by Murphy and Welch (1991) that emphasised on revaluation of US dollar was based on a false premise. 2 Such one-to-one correspondence fails to hold when domestic factors of production are not sectorally mobile or the production technologies exhibit factor intensity reversals. 3 We are indebted to Ron Jones for pointing this out. 4 If we assume that a fraction of the rural income is spent on the non-traded good, the formal non- traded sector is no longer a part of the independent subsystem.
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