Factor mobility and wage inequality in the presence of specialisation-based external economies

Abstract

By making use of a simple general-equilibrium model that is relevant to a high-income developing country or a newly industrialised country, this paper examines the link between factor mobility and wage inequality. It is shown that, in the presence of specialisation-based external economies, emigration of skilled as well unskilled labour increases wage inequality even if the income shares of capital are identical across industries. On the other hand, outflow of capital decreases wage inequality.