Wage Inequality In Developing Countries: Market Forces Or Government Intervention

Abstract

Wage dispersion had increased significantly in developing countries, despite the openness to trade of these economies. Research on this issue, using approaches valid under the assumption of conventional demand-supply competitive framework, conclude that this observed increase in wage inequality is a consequence of an increase in skills premium. In this paper we show that this conclusion could be bias if government intervention is not taken into account. Here we find that in Uruguay most of the increase in wage dispersion could be explain by a significant increase in public wages and a decrease of minimum wage. In addition, we observe that the impact of these intervetions are different depending on the degree of concentration of population and economic activity.