International migration of labour and skilled–unskilled wage inequality in a developing economy

Abstract

The paper develops a three sector general equilibrium structure with diverse trade pattern and imperfection in the unskilled labour market to analyze the consequences of international mobility of skilled and unskilled labour on the skilled–unskilled wage inequality in the developing economies. It shows that the effects of international migration of labour on the wage inequity crucially depend on both the relative capital intensities between the low-skill and high-skill sectors and the institutional nature of the markets for unskilled labour. The analysis finds that an emigration (immigration) of either type of labour is likely to produce a favourable (an unfavourable) effect on the wage inequality. In particular, the result of emigration (immigration) of skilled labour on the relative wage inequality is counterintuitive. These results have important policy implications for an overpopulated developing country like India.