Fair Wage Hypothesis, International Factor Mobility and Skilled-Unskilled Wage Inequality in a Developing Economy

Agell and Lundborg (1995) have accommodated the fair wage hypothesis (FWH) in an otherwise 2x2 Hechscher-Ohlin-Samuelson model for examining the robustness of certain standard trade theorems. The present paper proposes to introduce the FWH in a three sector general equilibrium model with two types of labour: skilled and unskilled. Skilled labour is specific to the high-skill sector and receives the efficiency wage while unskilled labour in the other two sectors receives either the competitive wage or the high unionized wage. Using such a framework the consequences of international mobility of factors of production on the skilled-unskilled wage inequality and unemployment of skilled labour in a developing economy have been analyzed. Both foreign capital inflows and emigration of skilled labour improve the skilled-unskilled wage inequality under reasonable condition. Particularly, the result relating to emigration of skilled labour is counterintuitive