This paper attempts to analyse the impact of trade
liberalisation on the skilledunskilled wage gap and the level of welfare
of developing countries, which are generally characterised by large
“informal” labour markets. A neo-classical full-employment foursector
model has been developed, where the informal sector produces either a
final product or an intermediate product on subcontracting basis.
Evidence shows that in either case, trade liberalisation, in the form of
an increase in foreign capital inflow, widens the skilled-unskilled wage
gap of the economy under some reasonable conditions. It also shows that
as a result of an increase in the foreign capital inflow, the level of
welfare of the economy increases, when the informal sector produces a
final product. However, when the informal sector produces an
intermediate product on subcontracting basis, the level of welfare of
the economy falls.