INTERNATIONAL CAPITAL FLOW, VANISHING INDUSTRIES AND TWO-SIDED WAGE INEQUALITY

This paper shows that international capital flow can lead to a rise in the relative wage between skilled and unskilled workers simultaneously in both capital-exporting and capital-importing nations. The impossibility of two-sided wage inequality as an outcome of exogenous shocks has been previously discussed in the literature. We argue that such a result is highly probable when some industries vanish following changes in factor prices as a consequence of factor flows. The asymmetry in the nature of finite changes is the critical factor.