Foreign Capital Inflow and Skill Formation: Effects on Skilled-Unskilled Wage Inequality

The existing theoretical literature asserts that the effects of foreign capital inflow on skilled-unskilled wage inequality depend crucially on the factor intensity conditions. The paper develops a three-sector full employment model and assumes a positive causal relation between foreign capital inflow and education subsidy. The comparative static results indicate that reduction in tax on foreign capital earning and improvement in institutional and legal framework, both leading to increased foreign capital inflow may reduce the skilled-unskilled wage inequality even under alternative factor intensity conditions. Thus the effects of investment liberalization policies on skilled-unskilled wage inequality depends more on the concomitant rise in skilled labour supply.