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Capital market distortion, firm dynamics and wage inequality

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posted on 2016-07-24, 00:00 authored by H Beladi, Chi-Chur Chao, Mong Shan EeMong Shan Ee
This paper examines the short- and long-run effects of capital market distortion on income distribution and social welfare in a developing dual economy. In addition to capital market distortion, we also consider the distortion that exists in the labor market. In particular, wage inequality is a consequence of the labor market distortion. The capital market distortion can lead to capital misallocation, which further affects the factor returns in the economy. We find that in the short run, a rise in the capital market distortion in favor of the urban firms do not yield a significant impact on wage inequality. However, the preferential policy on lower capital costs to the urban firms can attract new entry to the urban sector, which could raise skilled wages through an increase in the demand for skilled labor, but lower unskilled wages by substituting capital for unskilled labor. Thus, the existence of the capital market distortion can contribute to wage inequality in the economy via firm dynamics.

History

Title of book

Research Institute for Economic Integration Working Papers Series

Series

RIEI WP series

Publisher

Xi’an Jiaotong-Liverpool University

Place of publication

Suzhou, China

Language

eng

Notes

Working paper number: 2016-05

Publication classification

BN.1 Other book chapter, or book chapter not attributed to Deakin

Copyright notice

2016, Xi’an Jiaotong-Liverpool University

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