Free Trade and Wage Inequality in an Advanced Economy

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Abstract

This paper develops a formal model for examining the impact of free trade on the wage inequality in the Northern economy and the sensitivity of wage inequality indices to changes in causal factors within a general equilibrium setting.

The model has three types of labor: sector-specific high-skilled, mobile unskilled and immobile unskilled labor. Thus, three types of wage inequality indices are derived. Selected comparative statics for changes in consumer expenditure shares, biased technological changes, changes in relative endowments are provided.

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