The impacts of capital market distortion on wage inequality, urban unemployment, and welfare in developing countries

- We employ the general equilibrium approach.
- We investigate how the change of capital market distortion influences wage gap.
- We also investigate how it influences urban unemployment and social welfare.
- A reduction of capital market distortion decreases wage gap and urban unemployment.
- An alleviation of capital market distortion generates a welfare gain.

This paper employs the general equilibrium approach to investigate how the change of rural-urban capital market distortion influences skilled-unskilled wage inequality and urban unemployment in developing countries. Our basic model shows that a decrease in capital market distortion will reduce the wage inequality and the urban unemployment rate. Our extended model confirms the main results of our basic model. Furthermore, this paper also analyzes the effect of capital market distortion on social welfare, and finds that an alleviation of capital market distortion will generate a welfare gain in both basic and extended models.