Factor mobility, wage inequality and welfare

This paper shows that inflow of skilled (unskilled) labour increases wage inequality and its effect on foreign investment in the industrial sector and welfare in the shortrun is positive (negative) as long as the positive (negative) impact on the output of varieties of producer services is sufficiently large. An increase in the supply of domestic capital decreases wage inequality and its effect on foreign investment and welfare in the shortrun is positive as long as the positive impact on the output of varieties of producer services is sufficiently large. The magnitude of the longrun effect on foreign investment, wage inequality and welfare depends on the size of external economies in the industrial sector. Inflow of skilled labour leads to an unambiguous increase in foreign investment, wage inequality and welfare, whereas inflow of unskilled labour decreases foreign investment and its effect on wage inequality and welfare is negative as long as the size of external economies is sufficiently large. An increase in the supply of domestic capital increases foreign investment and its effect on wage inequality and welfare is positive as long as the size of external economies is sufficiently large.