Redistribution and wage inequality

This paper explores how redistribution affects skilled-unskilled wage inequality through the general equilibrium approach. We analyze six redistribution policies, which includes redistribution from (1) skilled labor to unskilled labor, (2) unskilled labor to skilled labor, (3) capital owners to skilled labor, (4) capital owners to unskilled labor, (5) skilled labor to capital owners, and (6) unskilled labor to capital owners. We find that redistribution policy (1) will reduce wage inequality, while redistribution policy (2) will increase wage inequality. For redistribution policies (3)-(6), how redistribution affects wage inequality depends on the labor intensities of the skilled sector and the unskilled sector. The result shows that redistribution does not necessarily reduce skilled-unskilled wage inequality.