The North-South HOS Model, inequality and globalization

Working Paper 2012-244

Abstract

The predictions from the traditional North-South HOS approach are at variance with the main characteristics of the Inequality-Globalization nexus. It is shown that by modifying this model and relaxing some of its most restrictive assumptions, it is possible to generate these characteristics. Four series of extensions are analysed: 1) divergent factor endowments between the North and the South and growing size of the South; 2) labour market rigidities resulting from a minimum wage or from the fair wage hypothesis; 3) the introduction of technological differences between countries, of technological transfers, of technological catching up and of technological biases; 4) the inserting of production segmentation and international outsourcing. Further possible extensions are also discussed. The resulting augmented North-South HOS approach provides suitable modelling of the Inequality-Globalization nexus.

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