The Role of Intangible Capital in Explaining Wage Inequality Between Skilled and Unskilled Workers

Abstract

Trade liberalization and technological improvement have made the movement of intangible capital feasible. Once the accumulated tangible capital reaches a certain level, its lower unit cost will attract the inflow of intangible capital, which will demand higher-skilled-workers. This paper analyzes the role of intangible capital in raising the wages for skilled workers in both developed and developing countries. Drawing on the outsource model by Feenstra, we develop an expanded model with four rather than three inputs: skilled and unskilled labour, and tangible and intangible capital. A production function, a long-run cost function, and a unit-cost function for the final good are derived to illustrate theoretically that the flow of intangible capital can be one source of the wage inequality for both developing and developed countries.