Relative Factor Return Gaps in Labour Markets and Global Integration

The paper estimates the role of integration in welfare generation in a cross country framework. Once controlling for institutions, openness is generally associated with increased wage inequalities across nations. However the results for trade policy are mixed. Decrease in import taxes increase wage inequality, whereas decrease in export taxes has an egalitarian effect. The results are applicable only to the larger sample of developed and developing countries. The results highlight the bottle neck faced by both developing and developed countries in WTO talks which have not been successful as yet in terms of further decrease in trade taxes. In case this situation prevails, the paper calls for more South-South trade which would enable developing countries to decrease the relative wage gaps among their labour force.