How growing asset inequality affects developing economies

• We show that an increase in asset inequality leads to wage inequality between skilled and unskilled labor.
• Increasing asset inequality raises the goods price and hence unemployment ratio.
• These effects lower social welfare of the economy.

Using a dual structure depicting a developing economy, this paper shows that an increase in asset inequality can lead to wage inequality between skilled and unskilled labor. In addition, increasing asset inequality raises the luxury goods price and hence the unemployment ratio. These effects lower the social welfare of the economy. To mitigate the adverse effect on wage inequality by asset inequality, a policy option to increase the urban minimum wage rate can be considered. However, this wage policy worsens social welfare by generating higher urban unemployment in the economy.