Skilled–unskilled wage inequality and imitation in a product variety model: A theoretical analysis

Abstract

The article develops a dynamic three-sector product variety model to analyze the role of imitation on skilled–unskilled wage inequality. One of these sectors produces varieties of innovated products with skilled labor as well as unskilled labor and another sector produces varieties of imitated products with only unskilled labor. Also, there is an R&D sector developing blueprints of new products with skilled labor as the only input. However, imitation is costless. It is shown that an increase in skilled (unskilled) labor endowment raises (lowers) the rate of growth, raises (lowers) the skilled–unskilled wage ratio, and lowers (raises) the level of social welfare. However, an increase in the rate of imitation raises this growth rate, lowers the skilled–unskilled wage ratio, and raises the level of social welfare.