Product variety, finite changes and wage inequality

- We study the effects of emigration and capital mobility on production re-organization.
- The results explain two-sided wage inequality.
- Explores conditions of finite changes in production patterns
- Factor mobility leads to production of variety in the North.
- Skilled-unskilled wage ratio rises both in North and South.

This paper presents a model with product variety to examine the effects of emigration and capital mobility between the North and the South on production reorganization and two-sided wage inequality. We obtain conditions under which the production patterns in both North and South undergo 'finite changes'. Overall, the production and trade patterns may be such that the South produces and exports a homogeneous good while the North, a commodity with varieties - the result driven not by technological changes, but by factor mobility. The results further suggest that the wage inequality rises in both countries in conformity with available empirical evidence.