International factor mobility, monopolistic competition, and wage inequality

This paper introduces monopolistic competition into two-sector general equilibrium models to investigate the impacts of international factor mobility on the skilled-unskilled wage inequality. The basic model shows that the change of skilled-unskilled wage inequality is determined by the comparison of the capital-labor distributive shares between the two sectors. The extended model finds that when the output of the monopolistically competitive sector is non-tradable, the mechanism in the basic model fails to work. Thus, we should pay special attention to the role that the non-tradable feature of final-good production plays. In addition, the welfare effects of an FDI inflow are also examined by the basic and extended models. (C) 2013 Elsevier B.V. All rights reserved.