Trade liberalization and wage distribution when skilled intermediate input is used in import competing sector that uses a commom type of capital

The presence of informal sector is a pervasive and persistent feature of most developing countries of the world. The phenomenon related to informal labor markets has become a great concern for our policy makers. This paper presents a simple theoretical model of a small open economy comprising of three formal and a single informal sector. Labour is the common factor of production which is segregated as skilled and unskilled ones. In accordance with the traditional specification it is assumed that skilled labours are used in the formal and informal labours are used in the informal sector. The distinguishing feature of the present paper is that the import competing formal sector uses both skilled and unskilled labours. Moreover, these two types of labour work in separate sectors using a common type of capital under the same economic structure. In such backdrop we tried to study the impact of trade liberalization on absolute and relative wage(s). It has been found that irrespective of factor intensity ranking both types of workers gain owing to tariff cut whereas under reasonable condition wage disparity between the two types of labour is reduced.