An Analysis of Income Distribution between the North and the South: the Grossman-Helpman and Lai Results Re-examined

This paper studies the effects of labor supply on relative wages in a dynamic North–South model of trade. Lai (1995)—a generalization of the Grossman and Helpman (1991a,b, ch. 11) models—showed that the relative wage of skilled (unskilled) labor in a region is positively (negatively) related to the supply of skilled (unskilled) labor in that region. These surprising results depend crucially on the specification of the functional form of the Southern imitation activity. We will show that these results (except for the relative wage of unskilled labor in Lai) are reversed in the case where the productivity of imitation depends only on the number of products the North manufactures.