Rural Dual Economics, Subsidy Policy, and the Income Inequality Between Skilled and Unskilled Workers

This chapter builds a general-equilibrium model with three sectors to study the effects of several modern-agricultural factor price subsidy policies on the income inequality between skilled and unskilled labor. We find that all types of price subsidies, including those on skilled labor, unskilled labor, and capital, enlarge the income inequality if capital is sector-specific, but they decrease this gap if capital moves freely between sectors. Moreover, to what extent the income gap would be altered depends on the ratio of factor income to total output, and we also find that the urban unemployment decreases under certain conditions regardless of capital mobility.