The role of behavioral choices in reducing wage inequality in developing countries

Reducing the wage gaps between skilled and unskilled workers as well as between urban and rural workers has been a special policy concern for the developing countries since trade liberalization has affected these wage gaps differently in different countries. This paper provides a new explanation for this variation in impacts by focusing on behavioral aspects such as the role of the supply elasticity of labor and the elasticity of exports. The novelty of this explanation is that to reduce wage inequality, behavior of workers or exporters can be influenced with less complicated policy measures compared to changing the immigration policy or the policy of fragmentation or changing the capital intensities of the industries suggested in the literature. It shows that trade liberalization in the form of a favorable change in the price of an exported intermediate good can have different effects on wage gaps, skill formation and unemployment for different developing economies depending on behavioral choices.