Labour, Trade, and Wage Inequality: Some New Results

This chapter reassesses the link between labour, trade, and wage inequality by proposing a simple modification of the standard 2-sector model with wage differential by incorporating the importance of consumption time. Emphasising that outsourcing of this time is limited by a country’s demographics, unlike outsourcing of production, which is restricted by both geography and technology, we focus on the role of a household sector that enables formal sector workers to monetise their time utilised in completing irksome household tasks by outsourcing them to unemployed-unskilled workers available in the labour market (hence, creating the so-called household jobs). The introduction of this sector alters some of the conventional results explaining the distributional effects of trade. In particular, we show how an increase in household labourers’ supply unambiguously benefits formal skilled and unskilled workers, without affecting their gross earnings and production activity, though net income inequality rises. However, the effect of trade on wage inequality depends on the extent to which the formal sector workers can free up their time by hiring household labourers. Our framework also questions the cornerstone of the traditional results on trade and wage inequality based on H-O-S type models and shows how one can explain the simultaneous increase in wage inequality (and hence, the effect on both skilled, unskilled and undocumented workers) in developed and developing economies around the world.