International factor mobility, monopolistic competition, and wage inequality

- We introduce monopolistic competition into two-sector general equilibrium models.
- We investigate how international factor mobility influences the wage inequality.
- The basic model shows that capital-labor distributive shares play a crucial role.
- The extended model shows that the mechanism in the basic model fails to work.
- The welfare effects of an FDI inflow are examined by the basic and extended models.

This paper introduces monopolistic competition into two-sector general equilibrium models to investigate the impacts of international factor mobility on the skilled-unskilled wage inequality. The basic model shows that the change of skilled-unskilled wage inequality is determined by the comparison of the capital-labor distributive shares between the two sectors. The extended model finds that when the output of the monopolistically competitive sector is non-tradable, the mechanism in the basic model fails to work. Thus, we should pay special attention to the role that the non-tradable feature of final-good production plays. In addition, the welfare effects of an FDI inflow are also examined by the basic and extended models.