Fragmentation and Wage Inequality: Insights from a Simple Model

Abstract

We develop a simple model to study how globalization affects wage inequalities. The model features three goods, one is an “international” good, and two are local non-tradable goods. The non-tradable goods are produced by local labor, either skilled or unskilled, while labor of all types and all origins contribute to the production of the international good. We find that increasing participation of the South in global production and consumption lead to an increase in wage inequalities in the North. Higher South integration into global value chains reduces North-South wage inequalities. JEL: F62, F16, F23 / KEYWORDS: Fragmentation of Production, Globalization, Wage Inequalities.