Migrants’ Remittances, Agricultural Producer Service and Wage Inequality in the Dual Economy

Abstract

Previous literature finds that migrants’ remittance narrows down wage inequality between skilled and unskilled labor, since the external funds flow into the rural area and raise wage rate of unskilled labor. However, it should be noted that the structure of agricultural production has also changed and small-scale agriculture utilizes remittance to purchase producer service that could substitute unskilled labor. The paper establishes three-sector general equilibrium models and theoretically analyzes the impact of an increase in remittance rate on wage inequality between skilled and unskilled labor. In the primary stage of service sector, an increase in remittance rate reduces both skilled and unskilled wage rate and has an ambiguous impact on wage inequality. The obtained result of wage inequality is robust even when we extend the basic theoretical model by considering the popularization stage of service sector.