Does Capital Market Liberalization Increase Wage Gap Between Skilled and Unskilled Workers and Lead to Immserization?….. A Theoretical Analysis

The purpose of the present paper is to explain how capital market liberalization can produce effects on two interlinked dimensions of development namely wage gap and welfare in an emerging market economy. For this purpose, we construct a three sector general equilibrium model. There are two exportable sectors producing agricultural commodity and manufacturing commodity. However, these sectors compete against each other for land. In the present paper we have also introduced the existence of import competing manufacturing sector. In the present paper capital is assumed to be mobile across three sectors of production. Skilled labour is used in production of both the manufacturing sectors. In the present paper we allow for capital market liberalization and hence capital is not a binding constraint. The domestic rate of interest is equal to foreign rate of interest plus risk premium. In the present paper we have shown that capital market liberalization may increase wage gap between skilled and unskilled labour and also lead to immserization.