GEP Research Paper 04/09
Fair Wages and Human Capital Accumulation in a Global Economy
Udo Kreickemeier
Abstract
This paper analyses trade in an asymmetric 2x2x2 world, where the two countries, labelled America and Europe, differ in their attitudes towards wage inequality. In both America and Europe, fair wage considerations compress differentials between the wages for skilled and unskilled workers, leading to involuntary unemployment of unskilled workers in equilibrium.
European workers are more averse to wage inequality than American workers though, and as a consequence Europe is characterised by lower wage differentials as well as higher unemployment. Allowing for endogenous skill formation in both countries, the effects of a globalisation shock – modelled as the entry of newly industrialising countries into the trading world – on prices and employment levels are derived.
Issued in April 2004.
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