Value Chain in Discrete Stages, Input Trade, and Distribution of Incomes

This paper extends the specific factor model of (Jones, J Polit Econ 79(3):437–459 (1971). http://www.jstor.org/stable/1830766 ) to input trade and global value chain with two discrete stages, and a large number of small but differently endowed countries specialising in the intermediate and final production stages of a manufactured good. Countries with larger endowments of skilled labour (relative to unskilled labour) have lower skilled-unskilled wage ratio regardless of whether they are in the lower stage of production or in the final stage. While this result may not be surprising, the interesting one that we establish is symmetric changes in the within-country distribution of factor incomes across countries. For example, a shift in consumers’ taste towards the consumption of manufactured good and away from food, which is the numeraire good, accentuates wage inequality between skilled and unskilled workers in both these sets of countries. Even though larger activities along the global value chain accentuate inequality, the results are somewhat asymmetrical if an increase in activity along the GVCs takes place via a fall in transport cost. What is even more interesting is that large endowment shocks that affect the relative world price of the manufactured good, may change wage inequality symmetrically regardless of in which set of countries such a shock originates.