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.