International Factor Mobility, Rural Development Policies and Wage Inequality in the Presence of Industrial Goods as Intermediate Input in Agriculture

The paper develops a three-sector small open economy model with two final good sector and a non-trade good sector producing industrial intermediate goods in agriculture. It is shown that an increase in either type of labour endowment (capital endowment) raises (lowers) the unemployment rate of either type of labour if the scale elasticity of output is very low. On the other hand, if the industrial sector is more capital intensive than the agricultural sector and if efficiency functions of both types of labour are identical, then an increase in either type of labour endowment (capital endowment) lowers (raises) the skilled–unskilled wage ratio. However, the effect of a change in capital endowment on the Gini Coefficient of wage income distribution is ambiguous in sign.