Communication Cost, Skilled-Unskilled Wage, and Informality
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Communication Cost, Skilled-Unskilled Wage, and Informality Biswajit Mandal1 · Sujata Ghosh1 © The Indian Econometric Society 2019
Abstract This paper establishes an interesting link between informality and time zone differences in a general equilibrium trade model for small open economy. Trading countries are located in different time zones of the world with non-overlapping working hours. Such differences in timing can be utilized in the production of services, and communication technology is an important factor that helps this trading process. In such a setup due to a reduction in communication cost, both skilled and unskilled workers are benefitted, skilled labour using service sector and formal unskilled sector expand. Interestingly, wage inequality between skilled and unskilled workers is widened under reasonable conditions. Another phenomenon that must draw our attention is the contraction of informality due to such changes. Then we extend the basic model to include capital mobility across all sectors and unionized wage in the formal sector. We find that the reduction in communication cost leads to finite change in the structure of production and one of the four sectors of the system vanishes. Subsequently, informal sector contracts while wage disparity is widened. Keywords International trade · General equilibrium · Time zone differences · Informal sector JEL Classification F 1 · D 58 · F 2 · F 11
Introduction International trade in goods and services between developed and developing economies has been steadily increasing in recent decades and one of its recent trends is the increase in the volume of trade in services. Trade in services is a kind of business services which do not require physical shipments of products and it is referred to as
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Sujata Ghosh [email protected] Department of Economics and Politics, Visva-Bharati University, Santiniketan 731235, India
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Journal of Quantitative Economics
consulting, engineering, business process outsourcing (BPO), software development etc. These types of trade can take place in different countries with different time zones (TZ) which become an important part of today’s world trade. In the last couple of years, new strands of papers have been published around this issue. Though distance and trade is a relatively older idea attached to the gravity model (Melitz 2007), the issue of time zone differences is a very contemporary phenomenon. Again, in a finer sense time zone induced trade via unfinished product is also largely borrowed from the literature on trade in intermediate inputs. This includes Sanyal (1983), Sanyal and Jones (1982), Dixit and Grossman (1982) and Marjit (1987) etc. Nevertheless, time zones, be it separated or overlapping, were not considered as a significant determining factor for trade till recent time. Marjit (2007) and Kikuchi (2006) have drawn on the Ricardian structure to analyze how trade in intermediate inputs (outsourcing) can be influenced by differences in time zones as utilization of TZ differences removes the undes
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