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Taxation of labour income and the skilled–unskilled wage inequality

Author

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  • Anwar, Sajid
  • Sun, Sizhong
Abstract
Using a simple general equilibrium model of a small open economy that produces (i) an industrial good, (ii) an agricultural good, and (iii) a sector specific intermediate good, under competitive conditions, this paper examines the impact of a tax on labour on skilled–unskilled wage inequality. It is shown that, when all goods are traded, a tax on labour in the industrial sector increases skilled–unskilled wage inequality. On the other hand, a tax on labour in the intermediate good sector has the opposite effect. However, when the intermediate good is non-traded, the impact of a tax on labour in either of the two sectors is negative. Furthermore, irrespective of whether or not the intermediate good is traded, a tax on labour in the agricultural sector increases skilled–skilled wage inequality.

Suggested Citation

  • Anwar, Sajid & Sun, Sizhong, 2015. "Taxation of labour income and the skilled–unskilled wage inequality," Economic Modelling, Elsevier, vol. 47(C), pages 18-22.
    • Handle: RePEc:eee:ecmode:v:47:y:2015:i:c:p:18-22
    DOI: 10.1016/j.econmod.2014.12.037
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